-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NHcibbMPDvOjQvFiNHC5hCE4eWr/VqwzoVJM/dai7LycAjcCJt1XkXCiEXiAB8WW LeZUJ9oZ3r2NnJdpzjU6sg== 0001060356-99-000017.txt : 19990719 0001060356-99-000017.hdr.sgml : 19990719 ACCESSION NUMBER: 0001060356-99-000017 CONFORMED SUBMISSION TYPE: 10-Q CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990603 FILED AS OF DATE: 19990716 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCMS INC CENTRAL INDEX KEY: 0001060356 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 820450118 STATE OF INCORPORATION: ID FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-50981 FILM NUMBER: 00000000 BUSINESS ADDRESS: STREET 1: 16399 FRANKLIN RD CITY: NAMPA STATE: ID ZIP: 83687 BUSINESS PHONE: 2088982600 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarter period ended June 3, 1999 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission File No. 333-50981 MCMS, INC. (Exact name of registrant as specified in its charter) Idaho 82-0480109 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 16399 Franklin Road, Nampa, Idaho 83687 (Address of principal executive offices, Zip Code) (208)898-2600 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes X No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares of Class A Common Stock outstanding at June 3, 1999: 3,282,427 Shares of Class B Common Stock outstanding at June 3, 1999: 863,823 Shares of Class C Common Stock outstanding at June 3, 1999: 874,999 MCMS, INC. INDEX Part I. Page Item 1 Financial Information Unaudited Consolidated Balance Sheets - June 3, 1999 and September 3, 1998 3 Unaudited Consolidated Statements of Operations - Three and Nine Months Ended 4 June 3, 1999 and May 28, 1998 Unaudited Consolidated Statements of Cash Flows - Nine Months Ended June 3, 1999 and May 28, 1998 5 Notes to Unaudited Consolidated Financial 6 Statements Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Certain Factors 14 Item 3 Quantitative and Qualitative Disclosures about Market Risk 19 Part II. Other Information Item 6 Exhibits 20 Signatures 21 2 PART I FINANCIAL INFORMATION - ---------------------------- ITEM 1. FINANCIAL STATEMENTS MCMS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
June 3, September 3, As of 1999 1998 - ----------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 1,530 $ 7,542 Trade account receivable, net of allowances for doubtful accounts of $323 and $97 42,831 34,231 Receivable from affiliates 1,424 2,096 Inventories 45,072 29,816 Deferred income taxes 705 1,255 Other current assets 920 356 ------------ ------------ Total current assets 92,482 75,296 Property, plant and equipment, net 66,094 62,106 Other assets 7,070 7,650 ------------ ------------ Total assets $ 165,646 $ 145,052 ============ ============ LIABILITIES AND SHAREHOLDERS' DEFICIT Current Liabilities: Current portion of long-term debt $ 448 $ 420 Accounts payable and accrued expenses 55,025 44,433 Payable to affiliates 235 775 Interest payable 4,684 197 ------------ ------------ Total current liabilities 60,392 45,825 Long-term debt, net of current portion 202,973 184,737 Deferred income taxes 18 1,286 Other liabilities 618 580 ------------ ------------ Total liabilities 264,001 232,428 Redeemable preferred stock, no par value, 750,000 shares authorized; issued and outstanding 292,060 and 266,313 shares, respectively; mandatory redemption value of $29.2 million and $26.6 million, respectively 28,352 25,675 SHAREHOLDERS' DEFICIT Series A convertible preferred stock, par value $0.001 per share, 6,000,000 shares authorized; issued and outstanding 3,261,177; aggregate liquidation preference of $36,949,135 3 3 Series B convertible preferred stock, par value $0.001 per share, 6,000,000 shares authorized; issued and outstanding 863,823 shares; aggregate liquidation preference of $9,787,115 1 1 Series C convertible preferred stock, par value $0.001 per share, 1,000,000 shares authorized; issued and outstanding 874,999 shares; aggregate liquidation preference of $9,913,739 1 1 Class A common stock, par value $0.001 per share, 30,000,000 shares authorized; issued and outstanding 3,282,427 and 3,261,177, respectively 3 3 Class B common stock, par value $0.001 per share, 12,000,000 shares authorized; issued and outstanding 863,823 shares 1 1 Class C common stock, par value $0.001 per share, 2,000,000 shares authorized; issued and outstanding 874,999 shares 1 1 Additional paid-in capital 60,689 63,318 Accumulated other comprehensive loss (2,144) (2,270) Retained deficit (185,212) (174,109) Less treasury stock at cost: Series A convertible preferred stock, 3,676 shares outstanding (42) - Class A common stock, 3,676 shares outstanding (8) - ------------ ------------ Total shareholders' deficit (126,707) (113,051) ------------ ------------ Commitments and contingencies - - Total liabilities and shareholders' deficit $ 165,646 $ 145,052 ============ ============ The accompanying notes are an integral part of the financial statement.
3 MCMS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Three months ended Nine months ended --------------------- --------------------- June 3, May 28, June 3, May 28, 1999 1999 1999 1998 Net sales $ 110,305 $ 88,565 $ 317,896 $ 234,246 Cost of goods sold 103,917 82,689 300,310 210,781 -------- --------- --------- --------- Gross profit 6,388 5,876 17,586 23,465 Selling, general and administrative 5,846 4,405 16,855 11,331 -------- --------- --------- --------- Income from operations 542 1,471 731 12,134 Other expense: Interest expense,net 5,023 4,418 14,669 4,088 Transaction expenses - 142 45 8,455 -------- --------- --------- --------- Loss before taxes and extraordinary item (4,481) (3,089) (13,983) (409) Income tax provision (benefit) - (1,052) (3,497) 1,015 -------- --------- --------- --------- Loss before extraordinary item (4,481) (2,037) (10,486) (1,424) Extraordinary item-loss on early extinguishment of debt, net of tax benefit of $403 - - (617) - -------- --------- --------- --------- Net loss (4,481) (2,037) (11,103) (1,424) Redeemable preferred stock dividends and accretion of preferred stock discount (945) (825) (2,678) (825) -------- --------- --------- --------- Net loss to common stockholders $ (5,426) $ (2,862) $ (13,781) $ (2,249) ======== ========= ========= ========= Net loss per common share - basic and diluted: Loss before extraordinary item$ (1.08) $ (0.57) $ (2.63) $ (1.35) Extraordinary item - - (0.12) - -------- --------- --------- --------- Net loss per share $ (1.08) $ (0.57) $ (2.75) $ (1.35)
======== ========= ========= ========= The accompanying notes are an integral part of the financial statements. 4 MCMS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
Nine months ended June 3, May 28, 1999 1998 -------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (11,103) $ (1,424) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Loss on extinguishment of debt 617 - Depreciation and amortization 11,609 9,026 Loss (gain) on sale of property, plant and equipment 15 (57) Write-off of deferred loan costs - 206 Changes in operating assets and liabilities: Receivables (8,195) (323) Inventories (15,265) (17,831) Other assets (1,077) (564) Accounts payable and accrued expenses 10,477 17,460 Interest payable 4,487 4,211 Deferred income taxes (315) (662) Other liabilities 22 248 --------- --------- Net cash provided by (used for) operating activities (8,728) 10,290 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (13,913) (17,548) Proceeds from sales of property, plant and equipment 11 376 --------- --------- Net cash used for investing activities (13,902) (17,172) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Capital contributions 48 1,786 Repurchase of common stock and recapitalization - (249,147) Proceeds from issuance of common stock - 10,200 Proceeds from issuance of convertible preferred stock - 51,000 Proceeds from and issuance of redeemable preferred stock - 24,000 Proceeds from borrowings 27,897 175,000 Repayments of debt (10,009) (1,513) Payment of deferred debt issuance costs (1,274) (7,809) Purchase of treasury stock (50) - --------- --------- Net cash provided by financing activities 16,612 3,517 --------- --------- Effect of exchange rate changes on cash and cash equivalents 6 (221) --------- --------- Net decrease in cash and cash equivalents (6,012) (3,586) Cash and cash equivalents at beginning of period 7,542 13,636 --------- --------- Cash and cash equivalents at end of period $ 1,530 $ 10,050 ========= =========
The accompanying notes are an integral part of the financial statements. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (TABULAR DOLLAR AMOUNTS IN THOUSANDS) 1. General The information included in the accompanying consolidated interim financial statements is unaudited and should be read in conjunction with the annual audited financial statements and notes thereto contained in the Company's Report on Form 10-K for the fiscal year ended September 3, 1998. In the opinion of management, all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results of operations for the interim periods presented have been reflected herein. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the entire fiscal year. 2. Effect of Recently Issued Accounting Standards During the first quarter of fiscal 1999, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for the presentation of comprehensive income or loss in financial statements. Other comprehensive income or loss includes income and loss components which are otherwise recorded directly to shareholders' equity under generally accepted accounting principles. The Company's total comprehensive loss, which includes net loss plus other comprehensive loss, for the third quarter and first nine months of fiscal 1999 was $4,406,000 and $10,976,000, respectively. The Company's comprehensive loss was $1,907,000 and $3,177,000 for the corresponding periods of fiscal 1998. The accumulated balance of foreign currency translation adjustments, excluded from net income or loss, is presented in the consolidated balance sheet as "Accumulated other comprehensive loss." In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, publicly held companies are required to report financial and other information about key revenue-producing segments of the entity for which such information is available and utilized by the chief operating decision-maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements must also be provided. SFAS No. 131 is effective for the Company in fiscal 1999 and the form of the presentation in the Company's financial statements has not yet been determined. In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." Under SOP 98-1, companies are required to capitalize certain costs of computer software developed or obtained for internal use, provided that those costs are not research and development. The Company is required to implement SOP 98-1 in fiscal 2000 and adoption is not expected to have a material effect on the Company's results of operations or financial position. 3. Inventories
June 3, September 3, 1999 1998 ----------- ----------- Raw materials and supplies $ 27,594 $ 18,126 Work in process 16,577 11,020 Finished goods 901 670 ----------- ----------- $ 45,072 $ 29,816 =========== ===========
4. Accounts payable and accrued expenses
June 3, September 3, 1999 1998 ----------- ----------- Trade accounts payable $ 48,879 $ 39,152 Short-term equipment contracts 868 543 Salaries, wages, and benefits 4,240 3,619 Other 1,038 1,119 ----------- ----------- $ 55,025 $ 44,433 =========== ===========
6 5. Long-term Debt
June 3, September 3, 1999 1998 ----------- ------------ Revolving loan, principal payments at the Company's option to February 26, 2003, interest due quarterly, interest rates ranging from 8.38% to 10.75% (8.38% at September 3, 1998) $ - $ 9,500 Senior credit facility, principal payments at the Company's option to February 26, 2004, interest due monthly, interest rates ranging from 7.19% to 7.75% (7.32% weighted average as of June 3, 1999) 26,057 - Senior equipment loan facility, principal payments at the Company's option to February 26, 2004, interest due monthly, 8.00% weighted average interest at June 3, 1999 1,828 - Senior subordinated notes (the "Fixed Rate Notes"), unsecured, interest at 9.75% due semiannually, mature on March 1, 2008 145,000 145,000 Floating interest rate subordinated term securities, (the "Floating Rate Notes"), unsecured, interest due semiannually, mature on March 1, 2008, variable interest rate equal to LIBOR plus 4.63% (9.75% and 10.22% at June 3, 1999 and September 3, 1998, respectively) 30,000 30,000 Note payable, matures on October 8, 1998, interest due at maturity, weighted average interest rate equal to interest earned on the Company's cash investments (5.24% at September 3, 1998) - 212 Note payable, quarterly installments through October 1, 2000, interest rate of 3.51% 283 445 Note payable, monthly installments through December 26, 1999, interest rate of 5.95% 253 - ---------- ----------- Total debt 203,421 185,157 Less current portion (448) (420) ---------- ----------- Long-term debt, net of current portion $ 202,973 $ 184,737 ========== ===========
On February 26, 1999, the Company entered into a $60 million Senior Credit Facility which matures on February 26, 2004. The Senior Credit Facility includes both a $10 million facility restricted to the purchase of qualifying equipment and a $50 million revolving credit facility. Amounts outstanding under the equipment loan facility bear interest at the lesser of the applicable Alternate Base Rate plus 0.25% or the Eurodollar Rate plus 2.50%, as defined in the agreement, and borrowings are limited to the first three loan years. Amounts outstanding under the revolving credit facility bear interest at the lower of the applicable Alternate Base Rate or Eurodollar Rate plus 2.25%. Amounts available to borrow under the revolving credit facility vary depending on accounts receivable and inventory balances, which serve as collateral along with substantially all of the other assets of the Company. The Senior Credit Facility includes a quarterly commitment fee of 0.375% per annum based upon the average unused portion and contains customary covenants such as restrictions on capital expenditures, additional indebtedness and the payment of dividends. In particular, the Senior Credit Facility contains a covenant requiring that the Company maintain a fixed charge ratio of not less than 1.0 to 1.0, provided, however, that this fixed charge ratio covenant will not be applied to any fiscal quarter during the term as long as the Company maintains at all times undrawn availability of more than $10 million. In addition, if at any time undrawn availability is less than $10 million, the fixed charge ratio will be applied to the immediately preceding month with respect to the twelve months then ended. The Senior Credit Facility 7 also contains customary events of default. Any default under the Senior Credit Facility could result in default of the Notes and Redeemable Preferred Stock, as defined below. As of June 3, 1999, the Company had a $26.1 million outstanding balance under the revolving credit facility and a $1.8 million outstanding balance on the equipment loan facility. On July 13, 1999, the Company amended the Senior Credit Facility (as amended, the "Credit Facility"). The amendment adds existing equipment to the borrowing base, modifies the advance rates and raises the maximum amount available to borrow based on inventory collateral, and allows the full amount of the credit facility to be drawn without triggering financial covenants if adequate collateral is available. As of July 13, 1999, the Company had a $20.2 million outstanding balance under the revolving credit facility and a $2.1 million outstanding balance on the equipment loan facility. As of July 13, 1999, the Company had approximately $21 million available to borrow under the Credit Facility without triggering the fixed charge ratio covenant, and $7.9 million available to borrow under the equipment loan facility, respectively. As of July 13, 1999, had the Company consumed its adjusted availability and been required to test the fixed charge ratio covenant, the tested would not have been satisfied. On February 26, 1998, the Company issued $25.0 million in 12-1/2% Redeemable Preferred Stock due on March 1, 2010 with a liquidation preference of $100 per share. Dividends are payable in cash or in-kind quarterly begin- ning June 1, 1998 at a rate equal to 12-1/2% per annum. To date, the Company has paid all dividends in-kind. 6. Net Loss Per Share Basic earnings per share is computed using net loss increased by dividends on the Redeemable Preferred Stock divided by the weighted average number of common shares outstanding. Diluted earnings per share is computed using the weighted average number of common and common stock equivalent shares outstanding. Common stock equivalent shares include shares issuable upon the exercise of outstanding stock options and shares issuable upon the conversion of outstanding convertible securities, and affect earnings per share only when they have a dilutive effect. Loss before extraordinary item per share and net loss per share for the three and nine months ended June 3, 1999 and May 28, 1998 is computed based on the weighted average number of common shares outstanding during each period of 5,014,711, 5,004,903, 5,000,000 and 1,667,333, respectively. The Company's basic earnings per share and its fully diluted earnings per share were the same for the three and nine month periods ended June 3, 1999 and May 28, 1998 because of the antidilutive effect of outstanding convertible securities and stock options. 7. Income Taxes The effective rate of the tax benefit for the three and nine months ended June 3, 1999 was none and 26.0%, respectively. The effective tax rate for fiscal 1999 primarily reflects the statutory corporate income tax rate, the net effect of state taxation, the effect of a tax holiday granted to the Company's Malaysian operation and a reduction in the benefit from income taxes due to the increase in the valuation allowance discussed below. The effective rate for the corresponding three month period of fiscal 1998 was 34.1%. The decrease in the effective rate of the tax benefit for the three month period ended June 3, 1999 relative to the corresponding period of fiscal 1998 was primarily due to the increase in the valuation allowance discussed below. For the corresponding nine month period of fiscal 1998 the Company had an income tax provision of $1.0 million and a pre tax loss of $0.4 million. The difference between the income tax benefit for the nine months ended June 3, 1999 and the income tax expense for the corresponding period of 1998 relates to nondeductible transaction costs related to the Recapitalization, in fiscal 1998, offset in part by an increase in the valuation allowance established during fiscal 1999. The Company does not provide for U.S. tax on the earnings of some of its foreign subsidiaries and, therefore, the effective rate may vary significantly from period to period. During the three months ended June 3, 1999, the Company increased its valuation allowance by $2.2 million to a balance of $2.7 million for the amount of the deferred tax asset which may not be realizable through either carrying back its net operating losses or through future income generated by reversal of deferred tax liabilities during the loss carryforward period. 8. Recapitalization On February 26, 1998 the Company completed a recapitalization (the "Recapitalization"). Prior to the closing of the Recapitalization, the Company was a wholly owned subsidiary of MEI California, Inc. ("MEIC"), a wholly owned subsidiary of Micron Electronics, Inc. ("MEI"). Under the terms of the amended and restated Recapitalization Agreement between the Company, MEIC, MEI and certain other parties, pursuant to which the Company effected the Recapitalization, certain unrelated investors (the "Investors") acquired an equity interest in the Company. In order to complete the Recapitalization, the Company arranged for additional financing in the form of notes and redeemable preferred stock totaling $200.0 million. The Company used the proceeds from the Investors' equity investment and the issuance of the notes and redeemable preferred stock to redeem a portion of MEIC's outstanding equity interest for approximately $249.2 million. MEIC continues to hold a 10% equity interest in the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements contained in this Form 10-Q that are not purely historical are forward-looking statements and are being provided in reliance upon the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. All forward-looking statements are made as of the date hereof and are based on current management expectations and information available to the Company as of such date. The Company assumes no obligation to update any forward-looking statement. It is important to note that actual results could differ materially from historical results or those contemplated in the forward-looking statements. Forward-looking statements involve a number of risks and uncertainties, and include trend information. Factors that could cause actual results to differ materially include, but are not limited to, those identified herein under "Certain Factors" and in other Company filings with the Securities and Exchange Commission. All quarterly references are to the Company's fiscal periods ended June 3, 1999, September 3, 1998 or May 28, 1998, unless otherwise indicated. MCMS, Inc. ("MCMS" or the "Company") is a leading electronics manufacturing services ("EMS") provider serving original equipment manufacturers ("OEMs") in the networking, telecommunications, computer systems and other sectors of the electronics industry. The Company offers a broad range of capabilities and manufacturing management services, including product design and prototype manufacturing; materials procurement and inventory management; manufacturing and testing of printed circuit board assemblies ("PCBAs"), memory modules and systems; quality assurance; and end-order fulfillment. MCMS provides services on both a turnkey and consignment basis. Under a consignment arrangement, the OEM procures the components and the Company assembles and tests them in exchange for a processing fee. Under a turnkey arrangement, the Company assumes responsibility for both the procurement of components and their assembly and test. Turnkey manufacturing generates higher net sales than consignment manufacturing due to the generation of revenue from materials as well as labor and manufacturing overhead, but also typically results in lower gross margins than consignment manufacturing because the Company generally realizes lower gross margins on material-based revenue than on manufacturing-based revenue. The Company also provides services on a partial consignment basis, whereby the OEM procures certain materials and the Company procures the remaining materials. Consignment revenues, excluding partial consignment revenues, accounted for 8.0% and 6.2% of the Company's net sales for the three and nine months ended June 3, 1999, respectively. Results of Operations
Three months ended Nine months ended ------------------ ------------------ June 3, May 28, June 3, May 28, 1999 1998 1999 1998 ------- -------- --------- ------- Net sales 100.0% 100.0% 100.0% 100.0% Costs of sales 94.2 93.4 94.5 90.0 ------- ------- ------- ------- Gross margin 5.8 6.6 5.5 10.0 Selling, general and administrative expenses 5.3 4.9 5.3 4.8 ------- ------- ------- ------- Income from operations 0.5 1.7 0.2 5.2 Interest expense, net 4.6 5.0 4.6 1.8 Transaction expenses - 0.2 - 3.6 ------- ------- ------- ------- Loss before taxes (4.1) (3.5) (4.4) (0.2) Income tax provision (benefit) - (1.2) (1.1) 0.4 Extraordinary loss - - (0.2) - ------- ------- ------- ------- Net loss (4.1)% (2.3)% (3.5)% (0.6)% ======= ======= ======= ======= Depreciation and amortization (1) 3.6% 4.0% 3.4% 3.9% ======= ======= ======= =======
(1) For the three and nine months ended June 3, 1999, the depreciation and amortization amount excludes $234,000 and $700,000, respectively, of deferred loan amortization that was expensed as interest. 9 Three Months Ended June 3, 1999 Compared to Three Months Ended May 28, 1998 Net Sales. Net sales for the three months ended June 3, 1999 increased by $21.7 million, or 24.5%, to $110.3 million from $88.6 million for the three months ended May 28, 1998. The increase in net sales is primarily the result of higher volumes of PCBA and system level shipments to customers in the networking and telecommunications industries. These increases were partially offset by lower PCBA and system level prices, lower volumes and prices on custom turnkey memory modules and lower prices on consigned memory modules. Net sales attributable to foreign subsidiaries totaled $8.4 million for the three months ended June 3, 1999, compared to $6.0 million for the corresponding period of fiscal 1998. The growth in foreign subsidiary net sales is primarily the result of higher volumes of PCBA shipments in both Malaysia and Belgium. This increase was negatively impacted by a shift from a turnkey to consignment model with the Company's largest customer at the Belgian facility early in the second quarter of fiscal 1999. Gross Profit. Gross profit for the three months ended June 3, 1999 increased by $0.5 million, or 8.7%, to $6.4 million from $5.9 million for the three months ended May 28, 1998. Gross margin for the three months ended June 3, 1999 decreased to 5.8% of net sales from 6.6% for the comparable period ended May 28, 1998. The increase in gross profit resulted primarily from increased sales at the Nampa, Malaysian and Belgian facilities partially offset by lower sales and increased demand volatility at the Durham facility. The Company's gross margin declined due to an increase in volume of PCBA sales accompanied by lower prices, lower prices on consigned memory modules and increased system level shipments, which typically have lower margins. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") for the three months ended June 3, 1999 increased by $1.4 million, or 32.7%, to $5.8 million from $4.4 million for the three months ended May 28, 1998. This increase for the three months ended June 3, 1999 was primarily the result of expenses associated with additional senior management to support future growth, additional program management personnel and additional expenses and headcount associated with the Company operating as a stand alone entity following the Recapitalization. SG&A expenses included a non-cash foreign currency expense of $0.4 million for the three months ended June 3, 1999 primarily related to an intercompany loan between the Company and its Belgian subsidiary. Interest Expense. Interest expense for the three months ended June 3, 1999 increased by $0.6 million, or 13.7%, to $5.0 million from $4.4 million for the three months ended May 28, 1998 due principally to additional borrowings on the Company's Credit Facility. Provision for Income Taxes. There was no income tax expense or benefit for the three months ended June 3, 1999 compared to a benefit of $1.1 million for the three months ended May 28, 1998. There was no effective rate for the three months ended June 3, 1999, as compared to 34.1% for the corresponding period of fiscal 1998. The decrease in the effective rate of the tax benefit during the three months ended June 3, 1999 relative to the corresponding period of fiscal 1998 was primarily due to an increase in the valuation allowance eliminating any income tax benefit for the three months ended June 3, 1999. The Company does not provide for U.S. tax on the earnings of its foreign subsidiaries and, therefore, the effective rate may vary significantly from period to period. Net Loss. For the reasons stated above, the net loss for the three months ended June 3, 1999 increased by $2.4 million to $4.5 million from $2.0 million for the three months ended May 28, 1998. As a percentage of net sales, net loss for the three months ended June 3, 1999 was 4.1% compared to 2.3% for the three months ended May 28, 1998. Nine Months Ended June 3, 1999 Compared to Nine Months Ended May 28, 1998 Net Sales. Net sales for the nine months ended June 3, 1999 increased by $83.7 million, or 35.7%, to $317.9 million from $234.2 million for the nine months ended May 28, 1998. The increase in net sales is primarily the result of higher volumes of PCBA and system level shipments to customers in the networking and telecommunications industries. These increases were partially offset by lower PCBA prices, lower volumes and prices of custom turnkey memory modules, and lower prices on consigned memory modules. Net sales attributable to foreign subsidiaries totaled $22.6 million for the nine months ended June 3, 1999, compared to $15.1 million for the corresponding period of fiscal 1998. The growth in foreign subsidiary net sales is primarily the result of additional sales of PCBA shipments at the Company's Malaysian operation. This increase was partially offset by lower volumes of custom turnkey memory modules at the Malaysian facility and by a shift from a turnkey to consignment model at the Belgian facility early in the second quarter of fiscal 1999. 10 Gross Profit. Gross profit for the nine months ended June 3, 1999 decreased by $5.9 million, or 25.1%, to $17.6 million from $23.5 million for the nine months ended May 28, 1998. Gross margin for the nine months ended June 3, 1999 decreased to 5.5% of net sales from 10.0% for the comparable period ended May 28, 1998. The decrease in gross profit and margin resulted primarily from increased demand volatility at the Durham facility and higher volumes of PCBA sales with lower average selling prices, lower prices on consigned memory modules, a decline in custom turnkey memory module sales at the Nampa and Malaysian facilities and increased system level shipments, which typically have lower margins. Selling, General and Administrative Expenses. SG&A expenses for the nine months ended June 3, 1999 increased by $5.5 million, or 48.8%, to $16.9 million from $11.3 million for the nine months ended May 28, 1998. This increase for the nine months ended June 3, 1999 was primarily the result of additional senior management to support future growth and additional expenses and headcount associated with operating the Company as a stand alone entity following the Recapitalization. SG&A expenses included a non-cash foreign currency expense of $0.7 million related to an intercompany loan between the Company and its Belgian subsidiary Interest Expense. Interest expense for the nine months ended June 3, 1999 increased to $14.7 million due primarily to the addition of $175 million in long-term debt issued or incurred in conjunction with the Recapitalizaton. Provision for Income Taxes. Income taxes for the nine months ended June 3, 1999 decreased by $4.9 million to a benefit of $3.9 million from an expense of $1.0 million for the nine months ended May 28, 1998. The Company's effective income tax rate for its benefit for the first nine months of fiscal 1999 was 26.0%. For the corresponding nine month period of fiscal 1998 the Company had an income tax provision of $1.0 million and a pre tax loss of $.4 million. The difference between the income tax benefit for the nine months ended June 3, 1999 and the income tax expense for the corresponding period of 1998 relates to nondeductible transaction costs related to the Recapitalization, in fiscal 1998, offset in part by an increase in the valuation allowance established during fiscal 1999. During the nine months ended June 3, 1999, the Company set up a valuation allowance of $2.7 million for the amount of the deferred tax asset which may not be realizable through either carrying back its net operating losses or through future income generated by reversal of deferred tax liabilities during the loss carryforward period. Extraordinary loss. The extraordinary after tax loss of the $0.6 million for the nine months ended June 3, 1999 resulted from the write-off of deferred financing costs related to the early retirement of the Company's Revolving Credit Facility. Net Loss. For the reasons stated above, net loss for the nine months ended June 3, 1999 increased by $9.7 million to a loss of $11.1 million from a loss of $1.4 million for the nine months ended May 28, 1998. As a percentage of net sales, net loss for the nine months ended June 3, 1999 was 3.5% compared to 0.6% for the nine months ended May 28, 1998. Liquidity and Capital Resources During the first nine months of fiscal 1999, the Company's cash and cash equivalents decreased by $6.0 million. Net cash consumed by operating activities was $8.7 million. Net cash used by investing activities was $13.9 million and net cash provided by financing activities was $16.6 million. Net cash used by investing activities during the first nine months of fiscal 1999 primarily consisted of capital expenditures for additional manufacturing capacity primarily in the U.S and implementation of the Company's new enterprise resource planning ("ERP") system. Net cash generated from financing activities principally resulted from net borrowings under the Credit Facility. The $8.7 million of cash consumed by operations was primarily due to an increase in accounts receivable of $8.2 million and an increase in inventory of $15.3 million during the nine months ended June 3, 1999. The growth in accounts receivables related primarily to increased sales. The inventory increase related to increased sales and, to a lessor extent, an end of quarter delay related to supplier delivery of key components and the transition from legacy material software to the new ERP software. The average collection period for accounts receivable and the average inventory turns were 36.9 days and 9.9 turns, respectively, for the nine months ended June 3, 1999 compared to 43.6 days and 11.5 turns, respectively, for the corresponding period in fiscal 1998. The average collection period for accounts receivable and the average inventory turns were 39.0 days and 10.0 turns, respectively, for the three months ended June 3, 1999 compared to 35.6 days and 10.0 turns, respectively, for the three months ended March 4, 1998. The average collection period and average inventory turn levels vary, among other things, as a function of sales 11 volume, sales volatility, product mix, payment terms with customers and suppliers and the mix of consigned and turnkey business. Capital expenditures during the first nine months of fiscal 1999 were $13.9 million, including $9.8 million for additional manufacturing capacity primarily in the U.S. and $4.1 million toward the implementation of the ERP system. The Company anticipates additional capital expenditures of $0.9 million in fiscal 1999 to complete the ERP system implementation. See "Year 2000 Readiness Disclosure" and "Certain Factors-ERP System Implementation." On February 26, 1999, the Company entered into a $60 million Senior Credit Facility which matures on February 26, 2004. The Senior Credit Facility includes both a $10 million facility restricted to the purchase of qualifying equipment and a $50 million revolving credit facility. Amounts outstanding under the equipment loan facility bear interest at the lesser of the applicable Alternate Base Rate plus 0.25% or the Eurodollar Rate plus 2.50%, as defined in the agreement, and borrowings are limited to the first three loan years. Amounts outstanding under the revolving credit facility bear interest at the lower of the applicable Alternate Base Rate or Eurodollar Rate plus 2.25%. Amounts available to borrow under the revolving credit facility vary depending on accounts receivable and inventory balances, which serve as collateral along with substantially all of the other assets of the Company. The Senior Credit Facility includes a quarterly commitment fee of 0.375% per annum based upon the average unused portion and contains customary covenants such as restrictions on capital expenditures, additional indebtedness and the payment of dividends. In particular, the Senior Credit Facility contains a covenant requiring that the Company maintain a fixed charge ratio of not less than 1.0 to 1.0, provided, however, that this fixed charge ratio covenant will not be applied to any fiscal quarter during the term as long as the Company maintains at all times undrawn availability of more than $10 million. In addition, if at any time undrawn availability is less than $10 million, the fixed charge ratio will be applied to the immediately preceding month with respect to the twelve months then ended. The Senior Credit Facility also contains customary events of default. Any default under the Senior Credit Facility could result in default of the Notes and Redeemable Preferred Stock, as defined below. As of June 3, 1999, the Company had a $26.1 million outstanding balance under the revolving credit facility and a $1.8 million outstanding balance on the equipment loan facility. On July 13, 1999, the Company amended the Senior Credit Facility (as amended, the "Credit Facility"). The amendment adds existing equipment to the borrowing base, modifies the advance rates and raises the maximum amount available to borrow based on inventory collateral, and allows the full amount of the credit facility to be drawn without triggering financial covenants if adequate collateral is available. As of July 13, 1999, the Company had a $20.2 million outstanding balance under the revolving credit facility and a $2.1 million outstanding balance on the equipment loan facility. As of July 13, 1999, the Company had approximately $21 million available to borrow under the Credit Facility without triggering the fixed charge ratio covenant, and $7.9 million available to borrow under the equipment loan facility, respectively. As of July 13, 1999, had the Company consumed its adjusted availability and been required to test the fixed charge ratio covenant, the tested would not have been satisfied. See "Notes to Consolidated Financial Statement--5. Long-term Debt" and "Certain Factors--Restrictions Imposed by Terms of Indebtedness and Redeemable Preferred Stock". The Company's principal sources of future liquidity are cash flows from operating activities and borrowings under the Credit Facility. The Company is highly leveraged and believes that these sources should provide sufficient liquidity and capital resources to meet its current and future interest payments, working capital and capital expenditures obligations. No assurance can be given, however, that this will be the case. See "Certain Factors--High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements." Year 2000 Readiness Disclosure State of Readiness The Year 2000 presents many issues for the Company because many computer hardware and software systems use only the last two digits to refer to a calendar year. Consequently, these systems may fail to process dates correctly after December 31, 1999, which may cause system failures. In October 1997, the Company established a cross-functional team chartered with the specific task of evaluating all of the Company's software, equipment and processes for Year 2000 compliance. This team determined that a substantial 12 portion of the Company's systems, including its company-wide ERP system, were not Year 2000 compliant and, therefore, developed a plan to resolve this issue which includes, among other things, implementing a new ERP system. The Company substantially completed implementation of this software in its US facilities late in the third quarter of fiscal 1999 with completion scheduled for the Company's Malaysian facility early in the fourth quarter of fiscal 1999 and the Belgian facility in late 1999. In addition, the Company retained the services of outside consulting firms to review and assess the Company's evaluation and implementation plan. The Company believes that the new ERP system will make all "mission critical" company information and operational systems Year 2000 compliant. As part of the Company's Year 2000 compliance evaluation, the Company began contacting key suppliers and significant customers to determine the extent to which the Company is exposed to third party failure to remedy their Year 2000 compliance issues. In order to assist in these efforts, the Company joined a Year 2000 high tech consortium comprised of a number of companies in the electronics industry. The mission of the consortium is to provide a framework to facilitate the sharing of information and practices concerning the Year 2000 readiness of suppliers as well as develop and utilize standardized tools and methods to assess, mitigate and plan for potential Year 2000 disruptions. The Company believes that its efforts and membership in the high tech consortium will significantly assist in the Year 2000 assessment of key suppliers and customers. However, there can be no assurance that such efforts and membership will adequately protect the Company from disruptions caused by the failure of some or all of the Company's key suppliers and customers to be Year 2000 compliant, which could have a material adverse effect on the Company's business, financial condition and results of operations. Costs The total costs, whether capitalized or expensed, associated with implementation and system modification relating to the Year 2000 problem is anticipated to be approximately $11.4 million, excluding internal programming time on existing systems. The total amount spent during the first nine months of fiscal 1999 and since inception on this implementation was $4.4 million and $10.2 million, respectively, with anticipated expenditures of approximately $1.2 million during the remainder of fiscal 1999. This amount includes the costs associated with new systems that will be Year 2000 compliant even though such compliance was not the primary reason for installation. Contingency Plan Although the Company has no formal contingency plan related to the ERP implementation at the present time, the implementation is on schedule with key implementation dates established and completion is slated for late fiscal 1999. If the ERP implementation is significantly delayed at any key implementation date, the Company will develop appropriate contingency plans. However, there can be no assurance that the Company will be able to develop contingency plans on a timely basis, or at all, which could have a material adverse effect on the Company's business, financial condition and results of operations. The Company will be attempting to develop a contingency plan designed to address other areas of the Company affected by the Year 2000 problem, including problems which might arise from the failure of the Company's key suppliers and customers to timely and adequately address Year 2000 issues. Contingency plans with respect to supplier Year 2000 problems may include, among other things, dual sourcing the supply of materials or changing suppliers. Risks Associated with the Company's Year 2000 Issues The Company presently believes that by modifying existing software and converting to new software, such as the ERP system, the Year 2000 problem will not pose significant operational problems for the Company's information systems. While the Company believes the ERP implementation has been successful the Company has encountered, and expects to continue to encounter, certain operational issues, which it expects to resolve shortly. However, if such modifications and conversions are not timely or properly implemented, the Year 2000 problem could affect the ability of the Company, among other things, to manufacture product, procure and manage materials, and administer functions and processes, which could have a material adverse effect on the Company's business, financial condition and results of operations. Additionally, failure of third party suppliers to become Year 2000 compliant on a timely basis could create a need for the Company to change suppliers and otherwise impair the sourcing of components, raw materials or services to the Company, or the functionality of such components or raw materials, any of 13 which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company's Year 2000 compliance efforts have caused significant strain on the Company's information technology resources and, as a result, could cause the deferral or cancellation of other important Company projects. There can be no assurance that the delay or cancellation of such projects will not have a material adverse effect on the Company's business, financial condition and results of operations. CERTAIN FACTORS In addition to factors discussed elsewhere in this Form 10-Q and in other Company filings with the Securities and Exchange Commission, the following are important factors which could cause actual results or events to differ materially from the historical results of the Company's operations or those results or events contemplated in any forward-looking statements made by or on behalf of the Company. High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements The Company is highly leveraged. At June 3, 1999, the Company had approximately $203.4 million of total indebtedness outstanding, and Series B 12-1/2% Senior Preferred Stock (the "Redeemable Preferred Stock") outstanding with an aggregate liquidation preference of $29.2 million. The Company may incur additional indebtedness from time to time to provide for working capital or capital expenditures or for other purposes, subject to certain restrictions in (i) the Senior Credit Facility (ii) the Indenture (the "Indenture") governing the Company's Series B 9-3/4% Senior Subordinated Notes due 2008 and the Series B Floating Interest Rate Subordinated Term Securities due 2008 (collectively, the "Notes"), (iii) the Certificate of Designation relating to the Redeemable Preferred Stock (the "Certificate of Designation") and (iv) the Indenture (the "Exchange Indenture") governing the 12-1/2% Subordinated Exchange Debentures (the "Exchange Debentures") due 2010 issuable in exchange for the Redeemable Preferred Stock. The level of the Company's indebtedness could have important consequences to the Company and the holders of the Company's securities, including, but not limited to, the following: (i) a substantial portion of the Company's cash flow from operations must be dedicated to debt service and will not be available for other purposes; (ii) the Company's ability to obtain additional financing in the future, as needed, may be limited; (iii) the Company's leveraged position and covenants contained in the Indenture, the Certificate of Designation, the Exchange Indenture and the Credit Facility may limit its ability to grow and make capital improvements and acquisitions; (iv) the Company's level of indebtedness may make it more vulnerable to economic downturns; and (v) the Company may be at a competitive disadvantage because some of the Company's competitors are less financially leveraged, resulting in greater operational and financial flexibility for such competitors. The ability of the Company to pay cash dividends on, and to satisfy the redemption obligations in respect of, the Redeemable Preferred Stock and to satisfy its debt obligations, including the Notes, will be primarily dependent upon the future financial and operating performance of the Company. Such performance is dependent upon the Company's rate of growth and profitability and the ability of the Company to manage its working capital effectively, including its inventory turns and accounts receivable collection period. The Company may require additional equity or debt financing to meet its interest payments, working capital requirements and capital equipment needs. There can be no assurance that additional financing will be available when required or, if available, will be on terms satisfactory to the Company. The Company's future operating performance and ability to service or refinance the Notes and to repay, extend or refinance the Credit Facility will be subject to future economic conditions and to financial, business and other factors, many of which are beyond the Company's control. If the Company is unable to generate sufficient cash flow to meet its debt service obligations or provide adequate long-term liquidity, it will have to pursue one or more alternatives, such as reducing or delaying capital expenditures, refinancing debt, selling assets or raising equity capital. There can be no assurance that such alternatives could be accomplished on satisfactory terms, if at all, or in a timely manner. Restrictions Imposed by Terms of Indebtedness and Redeemable Preferred Stock The Indenture, the Certificate of Designation, the Exchange Indenture and the Credit Facility contain certain covenants that restrict, among other things, the ability of the Company and its subsidiaries to incur additional 14 indebtedness, consummate certain assets sales and purchases, issue preferred stock, incur liens, pay dividends or make certain other restricted payments, enter into certain transactions with affiliates, merge or consolidate with any other person or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of the assets of the Company and its subsidiaries, none of which impaired the Company's ability to conduct business in the first nine months of fiscal 1999. A breach of any of these covenants could result in a default under the Credit Facility, the Indenture and the Exchange Indenture and would violate certain provisions of the Certificate of Designation. The Credit Facility contains a covenant requiring that the Company maintain a fixed charge ratio of not less than 1.0 to 1.0, provided, however, that this fixed charge ratio covenant will not be applied to any fiscal quarter during the term as long as the Company maintains at all times undrawn availability of more than $10 million. As of July 13, 1999, had the Company consumed its adjusted availability and been required to test the fixed charge ratio covenant, the tested would not have been satisfied. In the event the Company is unable to satisfy the requirements of this fixed charge ratio, the availability of capital from bank borrowings, including but not limited to the ability to access the Credit Facility, could be adversely affected. The inability to borrow under the Credit Facility could have a material adverse effect on the Company's business, financial condition and results of operations. Upon an event of default under the Credit Facility, the Indenture or the Exchange Indenture, the lenders thereunder could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. In the case of the Credit Facility, if the Company were unable to repay those amounts, the lenders thereunder could proceed against the collateral granted to them to secure that indebtedness. Such collateral is comprised of substantially all of the tangible and intangible assets of the Company, including the capital stock and membership interests of its subsidiary stock. Customer Concentration; Dependence on Certain Industries Certain customers account for significant portions of the Company's net sales. For the first nine months of fiscal 1999 approximately 83.7% of net sales were derived from networking and telecommunications customers. In addition, for the third quarter and first nine months of fiscal 1999, the Company's ten largest customers accounted for approximately 88.0% and 87.3%, respectively, of net sales. The Company's top two customers accounted for approximately 44.5% and 20.5%, respectively, of net sales in the first nine months of fiscal 1999. In addition, the Company has another major customer that operates under a consignment manufacturing model and, while sales are less than 10% of total revenue, the customer makes an important contribution to the Company's overall financial performance. Moreover, the Company has significant customer concentration at a site level. Volatility in demand from these customers may lead to reduced site capacity utilization and have a negative effect on the Company's gross margin. Decreases in sales to or margins with these or any other key customers could have a material adverse effect on the Company's business, financial condition and results of opera- tions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." The Company expects to continue to depend upon a relatively small number of customers for a significant percentage of its net sales. There can be no assurance that the Company's principal customers will continue to purchase services at current levels, if at all. The percentage of the Company's sales to these customers may fluctuate from period-to-period. Significant reductions in sales to any of the Company's major customers as well as period-to-period fluctuations in sales and changes in product mix ordered by such customers could have a material adverse effect on the Company's business, financial con- dition and results of operations. In addition, in the event the Company were to lose a key customer at a specific site, the Company may be forced to reduce its workforce at such site, reallocate manufacturing demand or close the site, any of which could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, the Company is dependent upon the continued growth, viability and financial stability of its OEM customers, which are in turn substantially dependent on the growth of the networking, telecommunications, computer systems and other industries. These industries are subject to rapid technologi- cal change, product obsolescence and price competition. Many of the Company's customers in these industries are affected by general economic conditions. Currency devaluations and economic slowdowns in various Asian and European economies may have an adverse effect on the results of operations 15 of certain of the Company's OEM customers, and in turn, their orders from the Company. These and other competitive factors affecting the networking, telecommunications and computer system industries in general, and the Company's OEM customers in particular, could have a material adverse effect on the Company's business, financial condition and results of operations. Moreover, any further volatility in the market for DRAM components caused by, among other things, the turmoil in the Asian economies, could have a material adverse effect on MTI, which has historically been one of the Company's major customers, and consequently the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." Variability of Results of Operations The Company's operations may be affected by a number of factors including economic conditions, price competition, the level of volume and the timing of customer orders, product mix, management of manufacturing processes, materials procurement and inventory management, fixed asset and plant utilization, foreign currency fluctuations, the level of experience in manufacturing a particular product, customer product delivery requirements, availability and pricing of components, availability of experienced labor and failure to introduce, or lack of market acceptance, new processes, services, technologies and products. In addition, the level of net sales and gross margin can vary significantly based on whether certain projects are contracted on a turnkey basis, where the Company purchases materials, versus on a consignment basis, where materials are provided by the customer (turnkey manufacturing tends to result in higher net sales and lower gross margins than consignment manufacturing). An adverse change in one or more of these factors could have a material adverse effect on the Company's business, financial condition and results of operations. In addition, customer orders can be canceled and volume levels can be changed or delayed. From time to time, some of the Company's customers have terminated their manufacturing arrangements with the Company, and other customers have reduced or delayed the volume of design and manufacturing services performed by the Company. Resolving customer obligations due to program or relationship termination and the replacement of canceled, delayed or reduced contracts with new business cannot be assured. Termination of a manufacturing relationship or changes, reductions or delays in orders could have a material adverse effect on the Company's business, financial condition and results of operations. Management of Growth Expansion has caused, and is expected to cause, strain on the Company's infrastructure, including its managerial, technical, financial, information systems and other resources. To manage further growth, the Company must continue to enhance financial and operational controls, develop or hire additional executive officers and other qualified personnel. Continued growth will also require increased investments to add manufacturing capacity and to enhance management information systems. See "Certain Factors-ERP System Implementation." There can be no assurance that the Company will be able to scale its internal infrastructure and other resources to effectively manage growth and the failure to do so could have a material adverse effect on the Company's business, financial condition and results of operations. The markets served by the Company are characterized by short product life cycles and rapid technology changes. The Company's ability to successfully support new product introductions is critical to the Company's customers. New product introductions have caused, and are expected to continue to cause, certain inefficiencies and strain on the Company's resources. Any such inefficiencies could have a material adverse effect on the Company's business, financial condition and results of operations. New operations, whether foreign or domestic, can require significant start-up costs and capital expenditures. In the event that the Company continues to expand its domestic or international operations, there can be no assurance that the Company will be successful in generating revenue to recover start-up and operating costs. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations." 16 ERP System Implementation In fiscal 1997, the Company finalized selection of a company-wide ERP software solution to, among other things, accommodate the future growth and requirements of the Company and, in early fiscal 1998, the Company began implementation of the ERP system. The Company based its selection criteria on a number of items it deemed critical, and included among other things, multi-site and foreign currency capabilities, 7x24 hour system availability, enhanced customer communications, end-order fulfillment and other mix mode manufacturing support and year 2000 compliance. The Company substantially completed implementation of this software in its US facilities late in the third quarter of fiscal 1999 with completion scheduled for the Company's Malaysian facility early in the fourth quarter of fiscal 1999 and the Belgian facility in late 1999. While the Company believes the ERP implementation has been successful the Company has encountered, and expects to continue to encoun- ter, certain operational issues, which it expects to resolve shortly. There can be no assurance that the Company will be successful and timely in its implementation efforts and any delay of, or problems associated with, such implementation could have a material adverse affect on the Company's business, financial condition and results of operations. Competition The electronics manufacturing services industry is intensely competitive and subject to rapid change, and includes numerous regional, national and international companies, a number of which have achieved substantial market share. The Company believes that the primary competitive factors in its target- ed markets are manufacturing technology, product quality, responsiveness and flexibility, consistency of performance, range of services provided, the location of facilities and price. To be competitive, the Company must provide technologically advanced manufacturing services, high quality products, flexible production schedules and reliable delivery of finished products on a timely and price competitive basis. Failure to satisfy any of the foregoing requirements could materially and adversely affect the Company's competitive position. The Company competes directly with a number of EMS firms, including Celestica International Holdings Inc., Flextronics International, Ltd., Jabil Circuits, Inc., SCI Systems, Inc., Sanmina Corporation and Solectron Corporation. The Company also faces indirect competition from the captive manufacturing operations of its current and prospective customers, which continually evaluate the merits of manufacturing products internally rather than using the services of EMS providers. Many of the Company's competitors have more geographically diversified manufacturing facilities, international procurement capabilities, research and development and capital and marketing resources than the Company. In addition, the Company may be at a competitive disadvantage because some of the Company's competitors are less financially leveraged, resulting in, among other things, greater operational and financial flexibility for such competitors. See "Certain Factors--High Level of Indebtedness; Ability to Service Indebtedness and Satisfy Preferred Stock Dividend Requirements." In recent years, the EMS industry has attracted new entrants, including large OEMs with excess manufacturing capacity, and many existing participants have substantially expanded their manufacturing capacity by expanding their facilities through both internal expansion and acquisitions. In the event of a decrease in overall demand for EMS services, this increased capacity could result in substantial pricing pressures, which could have a material adverse effect on the Company's business, financial condition and results of operations. Capital Requirements The Company believes that, in order to achieve its long-term expansion objectives and maintain and enhance its competitive position, it will need significant financial resources over the next several years for capital expenditures, including investments in manufacturing capabilities and manage- ment information systems, working capital and debt service. The Company has added significant manufacturing capacity and increased capital expenditures since 1995. In April 1995, it opened its Durham, North Carolina facility. In October 1996, it opened its first international facility in Penang, Malaysia and moved from its former Boise, Idaho facility to a new facility in Nampa, Idaho. In November 1997, it purchased its first European facility in Colfontaine, Belgium from Alcatel. In June 1999, the Company announced that it would move its Penang, Malaysia facility from the original 18,000 square foot facility into an 118,000 square foot facility by September of 1999. The precise amount and timing of the Company's future funding needs cannot be determined at this time and will depend upon a number of factors, including the demand for the Company's services and the Company's management of its working capital. The Company may not be able to obtain additional financing on 17 acceptable terms or at all. If the Company is unable to obtain sufficient capital, it could be required to reduce or delay its capital expenditures and facilities expansion, which could materially adversely affect the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." International Operations The Company currently offers EMS capabilities in North America, Asia and Europe. In the third quarter of fiscal 1999, net sales attributable to foreign operations totaled $8.4 million or 7.6% of total net sales. The Company may be affected by economic and political conditions in each of the countries in which it operates and certain other risks of doing business abroad, including fluctuations in the value of currencies, import duties, changes to import and export regulations (including quotas), possible restrictions on the transfer of funds, employee turnover, labor or civil unrest, inadequate law enforcement, long payment cycles, greater difficulty in collecting accounts receivable, the burdens, cost and risk of compliance with a variety of foreign laws, and, in certain parts of the world, political and economic instability. In addition, the attractiveness of the Company's services to its United States customers is affected by United States trade policies, such as "most favored nation" status and trade preferences, which are reviewed periodically by the United States government. Changes in policies by the United States or foreign governments could result in, for example, increased duties, higher taxation, currency conversion limitations, hostility toward United States-owned operations, limitations on imports or exports, or the expropriation of private enterprises, any of which could have a material adverse effect on the Company's business, financial condition or results of operations. The Company's Belgian operations are subject to labor union agreements covering managerial, supervisory and production employees, which set standards for, among other things, the maximum number of working hours and minimum compensation levels. In addition, economic considerations may make it difficult for the Company to compete effectively compared to other lower cost European locations. The Company's Malaysian operations and assets are subject to significant political, economic, legal and other uncertainties customary for businesses located in Southeast Asia. The Company's international operations are based in Belgium and Malaysia. The functional currencies of the Company's international operations are the Belgian Franc and the Malaysian Ringgit. The Company's financial performance may be adversely impacted by changes in exchange rates between these currencies and the U.S. dollar. Fixed assets for the Belgian and Malaysian operations are denominated in each entity's functional currency and translation gains or losses will occur as the exchange rate between the local functional currency and the U.S. dollar fluctuates on each balance sheet reporting date. The Company's investments in fixed assets as of June 3, 1999 were $5.8 million (8.7% of total fixed assets) and $4.6 million (7.0% of total fixed assets) in Belgium and Malaysia, respectively. As of June 3, 1999, the Company's $2.1 million net cumulative translation loss was comprised of a $2.2 million cumulative translation loss for the Malaysian operation offset by a $0.1 million cumulative translation gain for the Belgian operation. The Company's equity investments in Belgium and Malaysia are long-term in nature and, there- fore, the translation adjustments are shown as a separate component of shareholders' equity and do not effect the Company's net income. An additional risk is that certain working capital accounts such as accounts receivable and accounts payable are denominated in currencies other than the functional currency and may give rise to exchange gains or losses upon settlement or at the end of any financial reporting period. Sales in currencies other than the functional currency were approximately 1.0% and 6.0% of consolidated sales for the quarter ended June 3, 1999 for Belgium and Malaysia, respective- ly. During fiscal 1998, the exchange rate between the Malaysian Ringgit and U.S. dollar was extremely volatile. In September 1998, the Malaysian government imposed currency control measures which, among other things, fixed the exchange rate between the United States dollar and the Malaysian Ringgit and make it more difficult to repatriate the Company's investments. In January 1999, the Euro became the official currency of eleven countries, including Belgium, and a fixed conversion rate between the Belgian Franc and the Euro was established. For three years after the introduction of the Euro, the participating countries can perform financial transactions in either the Euro or their original local currencies. This will result in a fixed exchange rate among the participating countries, whereas the Euro (and the participating countries' currencies in tandem) will continue to float freely against the U.S. dollar and other currencies of non-participating countries. The Company is currently evaluating the timing of changing the functional currency of its Belgian operation from the Belgian Franc to the Euro and is required to 18 finalize this change no later than January 2002. The Company attempts to minimize the impact of exchange rate volatility by entering into U.S. dollar denominated transactions whenever possible for purchases of raw materials and capital equipment and by keeping minimal cash balances of foreign currencies. Direct labor, manufacturing overhead, and selling, general and administrative costs of the international operations are also denominated in the local currencies. Transaction losses are reflected in the Company's net income. As exchange rates fluctuate, the Company will continue to experience translation and transaction adjustments related to its investments in Belgium and Malaysia which could have a material and adverse effect on the Company's business, financial condition and results of operations. Dependence on Key Personnel The Company's continued success depends to a large extent upon the efforts and abilities of key managerial and technical employees. The Company's business will also depend upon its ability to continue to attract and retain qualified employees. Although the Company has been successful in attracting and retaining key managerial and technical employees to date, the loss of services of certain key employees, in particular, any of its executive officers, or the Company's failure to continue to attract and retain other key managerial and technical employees could have a material adverse effect on the Company's business, financial condition and results of operations. Environmental Regulations The Company is subject to a variety of environmental laws and regulations governing, among other things, air emissions, waste water discharge, waste storage, treatment and disposal, and remediation of releases of hazardous materials. While the Company believes that it is currently in material compliance with all such environmental requirements, any failure to comply with present and future requirements could have a material adverse effect on the Company's business, financial conditions and results of operations. Such requirements could require the Company to acquire costly equipment or to incur other significant expenses to comply with environmental regulations. The imposition of additional or more stringent environmental requirements, the results of future testing at the Company's facilities, or a determination that the Company is potentially responsible for remediation at other sites where problems are not presently known, could result in expenditures in excess of amounts currently estimated to be required for such matters. Concentration of Ownership Cornerstone Equity Investors and certain other investors beneficially own, in the aggregate, approximately 90.0% of the outstanding capital stock (other than the Redeemable Preferred Stock) of the Company. As a result, although no single investor has more than 49.0% of the voting power of the Company's outstanding securities or the ability to appoint a majority of the directors, the aggregate votes of these investors could determine the composition of a majority of the board of directors and, therefore, influence the management and policies of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company uses the U.S. dollar as its functional currency, except for its operations in Belgium and Malaysia. The Company has evaluated the poten- tial costs and benefits of hedging potential adverse changes in the exchange rates between U.S. dollar, Belgian Franc and Malaysian Ringgit. Currently, the Company does not enter into derivative financial instruments because a sub- stantial portion of the Company's sales in these foreign operations are in U.S. dollars. The assets and liabilities of these two operations are translated into U.S. dollars at an exchange rates in effect at the period end date. Income and expense items are translated at the year-to-date average rate. Aggregate transaction losses included in net income for the third quar- ter and first nine months of fiscal 1999 were $0.4 million and $0.7 million, re- spectively, for the Belgian operation. There were no transaction losses for the Malaysian operation in either period. 19 PART II OTHER INFORMATION - --------------------------------- ITEM 6. EXHIBITS (a) The following are filed as part of this report: Exhibit Description 10.17(a) Lease, dated as of June 18, 1999, by and between MCMS, Sdn. Bhd. and Klih Project Management, Sdn. Bhd. 10.4 (c) First Amendment, dated as of July 13, 1999, to Credit Agreement, dated as of February 26, 1999, among MCMS, Inc., PNC Bank, as agent, and various lending institutions. 27 Financial Data Schedules. (b) Reports on Form 8-K: During the third quarter of Fiscal 1999, no reports on Form 8-K were filed. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on behalf of the registrant by the following duly authorized person. MCMS, Inc. (Registrant) Date: July 16, 1999 /s/ Chris J. Anton Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Accounting Officer) 21 EX-10.17(A) 2 DATED THIS 18TH DAY OF JUNE 1999 BETWEEN KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D) ("LESSOR") AND MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X) ("MEC") AND MCMS SDN. BHD. (Company No.399136-M) ("LESSEE") ****************************************** AGREEMENT FOR A LEASE ****************************************** MESSRS GHAZI & LIM ADVOCATES & SOLICITORS 19TH FLOOR, MWE PLAZA NO.8 LEBUH FARQUHAR 10200 GEORGETOWN PENANG, WEST MALAYSIA TEL: (604)-2633688 FAX: (604)-2627433 E-MAIL: gnlpg@po.jaring.my (OUR REF: M38/99/KBC/c) Disk C8: M38-99LE.ASE 22 THIS AGREEMENT FOR A LEASE is made the 18th day of June 1999 BETWEEN: 1. PARTIES 1.1 Lessor KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (hereinafter referred to as "the Lessor") of the first part; AND 1.2 MEC MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217- X), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (hereinafter referred to as "MEC") of the second part; AND 1.3 Lessee MCMS SDN. BHD. (Company No.399136-M), a company incorporated in Malaysia and having its registered office at 7th Floor (Room 7-02) Wisma Penang Garden, No.42 Jalan Sultan Ahmad Shah, 10050 Penang, Malaysia (hereinafter referred to as "the Lessee") of the third part. 2. RECITALS 2.1 The Lessor is the registered proprietor of all those five (5) pieces of land known as Lots No.P.T.1223, 1224, 1225 and 1226, Mukim 12, Daerah Barat Daya, Negeri Pulau Pinang held under Suratan Hakmilik Sementara No.H.S.(D)6941, 6942, 6943 AND 6944 and Lot No.8130, Mukim 12, Daerah Barat Daya held under Pajakan Negeri No.1765 together with the factory erected thereon (hereinafter referred to as "the Factory") located at Lorong Sg. Tiram, Bayan Lepas, FIZ II, 11900 Bayan Lepas, Penang with a built up area of approximately 118,340.92 square feet made up as follows: (a) production floor space 37,629 square feet; (b) office space 17,500 square feet; and (c) warehouse and other space 63,211.92 square feet and the furnitures, air-conditioners, lighting and other fittings as set out in the inventory list annexed hereto as the First Schedule (hereinafter referred to as "the Furniture and Fittings")(the abovementioned Land, the Factory and the Furnitures and Fittings are hereinafter collectively referred to as "the Demised Land") 23 2.2 The Lessor has charged the Demised Land to STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P), a company incorporated in Malaysia under the Companies Act, 1965 and having a place of business at No.2 Beach Street, 10300 Penang (hereinafter referred to as "the Chargee") under Charge Presentation No.3571/98 Volume No.780 Folio No.100 (hereinafter referred to as "the Charge") as security for a loan granted by the Chargee to MEC. 2.3 By an agreement made the 22nd day of August 1996 between the Lessor of the one part and MEC of the other part (hereinafter referred to as "the Sale and Purchase Agreement") the Lessor, with the consent of the Chargee sold and MEC purchased the Demised Land for the consideration and upon the terms and conditions more fully set out in the Sale and Purchase Agreement. 2.4 MEC has paid the full purchase price of the Demised Land and fully complied with the terms and conditions of the Sale and Purchase Agreement as hereby irrevocably and expressly acknowledged by the Lessor but the Demised Land has yet to be transferred to MEC. 2.5 The Demised Land is subject to the following restrictions in interest:- 2.5:1 The Demised Land shall not be transferred, charged, leased, sub-leased or otherwise in any manner dealt with or dispose of without the written sanction of the State Authority; and 2.5:2 The Demised Land shall not be sub- divided. 2.6 MEC and the Lessor, with the consent of the Chargor has agreed to let and the Lessee has agreed to take a lease of the Demised Land for the duration and upon the terms and conditions of this Agreement. 3. DEFINITIONS AND INTERPRETATIONS 3.1 Definitions Unless the context shall otherwise require, the terms defined in Clause 1 shall for all purpose of this Agreement have the meaning specified. Contractual : The period of three (3) years and three Terms (3) months and includes the renewed term if the Option to Renew specified in Clause 11 is exercised Chargee : STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P) 24 Demised Land : All those five (5) pieces of land known as Lots No.P.T.1223, 1224, 1225 and 1226, Mukim 12, Daerah Barat Daya, Negeri Pulau Pinang held under Suratan Hakmilik Sementara No.H.S.(D)6941, 6942, 6943 AND 6944 respectively and Lot No.8130, Mukim 12, Daerah Barat Daya held under Pajakan Negeri No.1765 as stated in the Schedule above together with the Factory erected thereon and the Furniture and Fittings thereto Factory : The factory erected on the Demised Land located at Lorong Sg. Tiram, Bayan Lepas, FIZ II, 11900 Bayan Lepas, Penang with a built up area of 118,340.92 square feet made up as follows: (a) production floor space 37,629 square feet (b) office space 17,500 square feet (c) warehouse and other space 63,211.92 square feet Furniture : The Furniture and Fittings in the Factory and Fittings as stated in the inventory list annexed hereto as the First Schedule Lease : The Lease of the Demised Land in Form 15A of the National Land Code for a term of three (3) years and three (3) months with an option to renew the Lease for a further term of three (3) years and three (3) months upon the same terms covenants and conditions contained therein and includes any instrument supplemental to it but at a revised rent as hereinafter provided and in the event the Lease is converted into a tenancy pursuant to Clause 6.4(b) the expression "the Lease" shall include the converted tenancy Lessor : KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D) MEC : MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X) Option to : The option to renew the Lease for a further term of Renew three (3) years and three (3) months as provided in Clause 11 Parties/Party : It means the Lessor and/or the Lessee and/or MEC 25 Renewed Term : The further period of three (3) years and three (3) months renewed pursuant to Clause 11 Rent : The amount of rental payable for the entire duration of the Lease and the renewed Lease which particulars are as described in Clause 5 herein Rent : The 1st day of September 1999 Commencement Date Sale and : The Agreement made the 22nd day of August 1996 between Purchase the Lessor as vendor and MEC as purchaser in respect Agreement of the Demised Land Sub-Tenant : LEMTRONICS SDN. BHD. (Company No.167912-P), a company incorporated in Malaysia and having its registered office at Bayan Lepas, FIZ, Phase II, 11900 Bayan Lepas, Penang Valuer : The valuer appointed pursuant to Clause 11.3(b) 3.2 Clauses and Clause Heading The Clause and paragraph heading in this Agreement are for the ease of reference only and shall not be taken into account in the construction or interpretation of any covenants conditions or proviso to which they refer. 3.3 Singular and Plural Meanings Words in this Agreement importing singular meaning shall where the context so admits include the plural meaning and vice versa. 3.4 Acts, Statute and Statutory Instruments References in this Agreement to any Acts, statutes or statutory instrument shall include and refer to any Acts, statute or statutory instrument amending consolidating or replacing them respectively from time to time and for the time being in force. 3.5 Gender Words in this Agreement of the masculine gender shall include the feminine and neuter gender and vice versa and words denoting natural persons shall include corporations and firms and all such words shall be construed interchangeably in that manner. 26 4. DEMISE The Lessor with the consent of MEC hereby demises and the Lessee hereby accepts a lease of the Demised Land inclusive of the Factory and the Furniture and Fittings TO HOLD the Demised Land to the Lessee for the Contractual Term SUBJECT to all rights easements privileges restrictions covenants and stipulations appearing in the title to the Demised Land YIELDING AND PAYING to the Lessor the Rent as stated and in the manner set out in Clause 5. 5. RENT 5.1 The Lessee shall pay the Lessor a Rent of Ringgit Malaysia One Hundred and Eighty Thousand (RM180,000.00) only per month for the Contractual Term in the following manner:- (a) the Rent for the first three (3) months or the first quarter of the Contractual Term shall be payable monthly in advance, the first month's Rent to be payable on the Rent Commencement Date and each subsequent payment for the next two (2) months to be made on or before the seventh (7th) day of each succeeding month; (b) the Rent for the rest of the Contractual Term shall be payable quarterly in advance on or before the seventh (7th) day of each succeding quarter. 5.2 There will be no increase in the Rent payable for the initial Contractual Term. 5.3 The Rent payable for the Renewed Term (in the event that the Lessee does exercise its option to renew) shall be the sum as calculated in accordance with Clause 11.3(b). 6. STATE AUTHORITY CONSENT 6.1 This Agreement shall be conditional upon the approval of the Penang State Authority without conditions or (if conditional) upon terms and conditions acceptable to the Lessee. 6.2 The Lessee's Solicitor shall apply for the consent of the Penang State Authority but the application fees and the consent fees (if any) imposed by the State Authority and the Penang Development Corporation shall be borne by MEC but payable by the Lessee and subsequently deducted from future Rent payable to the Lessor under this Agreement. 27 6.3 The Lessee may appeal against any of the conditions imposed by the Penang State Authority. 6.4 In the event the approval of the Penang State Authority cannot be obtained and/or the appeal against the conditions imposed by the Penang State Authority is rejected and/or the conditions imposed by the Penang State Authority are not acceptable to the Lessee, the Lessee shall by notice in writing to the Lessor, elect either to:- (a) terminate this Agreement whereupon the Lessee shall deliver up possession of the Demised Land to the Lessor and neither party shall have any further claims whatsoever; or (b) convert this Agreement into a tenancy exempt from registration for three (3) years with an option to renew for a further period of three (3) years but otherwise upon the same terms and conditions as this Agreement and the expressions "the Contractual Term" and "the Renewed Term" shall wherever appearing herein be construed accordingly and the parties undertake to pay all such charges and consent fees and do all acts and things and execute all such documents as may be necessary or expedient to perfect the tenancy of the Demised Land. 6.5 Notwithstanding anything to the contrary herein, the Lessee shall pay and continue to pay the Rent herein unless and until this Agreement is terminated pursuant to Clause 6.4(a). 6.6 The Lessee shall inform the Lessor upon the acceptance of the approval of the State Authority to the Lease and the Parties shall within seven (7) days of the notice from the Lessee's Solicitors execute the Lease in the form of the Lease Annexure annexed hereto as the Second Schedule and all other relevant documents and to as many copies thereof as may be necessary. 7. LESSEE'S COVENANTS The Lessee covenants with the Lessor and/or MEC as follows:- 7.1 To pay the Rent on the days and in the manner set out in this Agreement; 7.2 To pay all charges (if any) for removal of refuse in connection with the occupation by the Lessee of the Demised Land; 28 7.3 To pay for all the water and electricity and other charges consumed by the Lessee on the Demised Land as from 1st July 1999 and the Lessee shall be entitled to all income in respect of the Demised Land from 1st July 1999; 7.4 To remove any unauthorised additions made to the Demised Land at the expiration of the Contractual Term unless agreed upon not to by the Parties hereto and the Lessee shall make good any part or parts of the Demised Land which may be damaged by such removal; 7.5 To permit the Lessor or MEC and/or its authorised servants or agents at reasonable times to enter into and inspect and view the Demised Land and examine their conditions after a seven (7) days written notice is given to the Lessee Provided that the Lessor/MEC and/or its authorised servants or agents shall comply with all reasonable directions of the Lessee with respect to security procedures to be observed and protective gears and special clothings to be worn by the Lessor's or MEC's servants and agents during the inspection; 7.6 To comply with the requirements of any relevant authorities relating to anything done upon the Demised Land by the Lessee and to indemnify the Lessor against all actions, proceedings, claims or demands which may be brought or made by reason of default in compliance with them; 7.7 To indemnify the Lessor or MEC against any claims proceedings or demands and costs and expenses so incurred which may be brought against the Lessor or MEC by any employee workman agent or visitor of the Lessee in respect of any accidental loss or damage whatsoever to person or property on the Demised Land due to the negligence or wilful act of the Lessee; 7.8 To pay the Rent to the Chargee whose receipt the Lessor and MEC hereby irrevocably acknowledge to the valid and sufficient discharge to the Lessee and to this end the Lessor and MEC undertake to execute an Assignment of the Rent herein to the Chargee upon such terms and conditions as the Chargee may require; 7.9 Not to cause any land roads or pavements on the Demised Land to be untidy or in a dirty condition and in particular not to deposit on them refuse or other materials; 7.10 Not to use the Demised Land for any illegal or immoral activities or purpose or to keep any animals or pets in it other than guard dogs; 29 7.11 Not to do in or upon the Demised Land anything which may be a nuisance annoyance disturbance inconvenience or damage to the occupiers of neighbouring factories; 7.12 Not without the prior written consent of the Lessor or MEC to assign underlet, charge or part with the possession of the Demised Land or any part thereof save and except to the Sub-Tenant; 7.13 Not to commit any waste; and 7.14 Not to hold or permit or suffer to be held on the Demised Land any sale by public auction. 8. YIELD UP At the expiration of the Contractual Term or the sooner termination of this Lease, the Lessee shall: 8.1 yield up the Demised Land in accordance with the terms of this Lease; 8.2 remove all signs erected by the Lessee in upon or near the Demised Land and immediately to make good any damage caused by such removal. 9. LESSOR'S AND MEC'S COVENANTS 9.1 The Lessor and MEC jointly and severally covenant and agree with the Lessee as follows:- (a) that if the Lessee shall pay the Rent hereby reserved and observe and perform the stipulations on their part herein contained they shall peaceably hold and enjoy the Demised Land during the Contractual Term without any interruption by the Lessor or any person rightly claiming under or in trust for it; (b) to grant the Option to Renew the Lease as stated in Clause 11; (c) to permit the Lessee to commence to fit out and renovate the Factory for its manufacturing and business activities forthwith upon execution of this Agreement; (d) to permit the Lessee to repair and make good and any existing defects and damage to Factory at the cost and expense of MEC provided always that the costs of such repairs shall be evidenced by the appropriate receipts shall not exceed the sum of Ringgit Malaysia One Hundred and Six Thousand (RM106,000.00) and provided further that the Lessee 30 shall advance for the costs of such repair and deduct such advances from the Rent payable under this Agreement; (e) to permit (but it shall not be obligatory upon) the Lessee to execute such repairs or works as verified by the Valuer or make such payments or perform such obligations of the Lessor and/or MEC herein including in particular MEC's covenants in Clauses 9.1(g) and 9.2 at the cost and expenses of MEC upon the failure or refusal of the Lessor and MEC to forthwith execute the same and any costs and expenses incurred shall be deducted or set off against the Rent payable herein subject to a maximum non-cumulative deduction equivalent to one (1) month's Rent per annum; (f) to permit the Lessee to sublet any part of the Demised Land to the Sub-Tenant on such terms and conditions as the Lessee may deem fit; and (g) to insure and keep the Factory fully insured for the full cost of rebuilding and reinstating the same with a reputable insurance office in the joint names of the Lessor and the Lessee against destruction or damage by fire, lightning, explosion, aircraft (including articles dropped from aircraft), riot, civil commotion, malicious persons, earthquake, storm, tempest, flood, bursting and overflowing of water pipes, tanks and other apparatus and impact by road vehicles and in case of any such damage or destruction as aforesaid happening to the Factory or any part thereof to apply any money received by it in respect thereof under any insurance in reinstating and restoring the parts thereof so damaged or destroyed. Subject to and without prejudice to this Clause, if the Factory or any part thereof shall be rendered unfit for use by reason of the damage or destruction as aforesaid, the Rent or a fair proportion of the Rent according to the nature and extent of the damage or destruction sustained shall ceased to be payable until the Factory or the affected part shall have been rebuilt or reinstated so that the Factory or the affected part are made fit for occupation or use save and except that in the event that the Factory cannot be rebuilt and reinstated or if the Tenant is unable to await the rebuilding and reinstatement of the Factory, the Lease shall absolutely determine. 9.2 MEC covenants and agrees with the Lessee as follows:- (a) to pay all existing and future quit rents and rates (assessment) and outgoings payable by law in respect of the Demised Land which payments shall be deducted from the Rent as provided for in clause 9.1(e) hereof; 31 (b) to keep the roof, main structures, external walls, main drains and pipes of the Factory in good tenantable repair and condition including if required by the relevant authorities, to repaint and redecorate the external walls of the Factory; (c) to indemnify and keep the Lessee fully indemnified against all breaches by the Lessor and MEC of its statutory duties or obligations including environmental damage due to or arising from anything done or carried out by the Lessor or MEC or its authorised servants agents workmen on the Demised Land. 10. LESSEE'S PROPERTY In the event that any property of the Lessee shall remain in or on the Demised Land after the Lessee has vacated the Demised Land on the expiry of the Contractual Term and the Lessee fails to remove it within fourteen (14) days after being requested in writing by the Lessor or MEC to do so or if after using its best endeavour the Lessor is unable to locate the Lessee within fourteen (14) days from the first attempt so made by the Lessor:- 10.1 The Lessor or MEC shall have the right to remove the property and all costs and expenses incurred for such removal and storage thereafter shall be borne by the Lessee; 10.2 The Lessor or MEC shall not be responsible for any actions damages claims proceedings costs expenses and demands caused by or related to the removal of the property; 10.3 The Lessor or MEC shall not be liable for any loss or damages suffered on the Lessee's property as a result of the removal and storage of the property. 11. OPTION TO RENEW 11.1 If the Lessee:- (a) has paid the Rent regularly during the Contractual Term; (b) has reasonably performed and observed the covenants contained in this Agreement; (c) notifies the Lessor in accordance with Section 11.2 below; 32 (d) then at the end of the initial Contractual Term the Lessor and MEC shall grant and the Lessee shall take a further lease for the Renewed Term of the Demised Land in accordance with the provisions set out in Section 11.3 below (hereinafter referred to as "the Renewed Term"). 11.2 A notice of exercise of option:- (a) must state clearly that the Lessee wishes to take a further lease of the Demised Land in accordance with the option contained in this Agreement; and (b) must be served not later than three (3) months before the end of the period of the initial Contractual Term. 11.3 The provision for the further lease will be the same as the provisions of this Agreement, with the following exceptions:- (a) the new lease will begin immediately after the end of the period of the initial Contractual Term; (b) the rent at the commencement of the new lease will be as mutually agreed between the Lessor or MEC and the Lessee and if the revised rent has not been agreed by the parties within one (1) month of the exercise of the Option to Renew, the same shall be determined by MR KHOO TIANG HUAT or any valuer of MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. (Company No.18149-U) of No.35 Green Hall, 10200 Penang or if MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. are no longer in property valuation practice, any independent valuer nominated by the President or its equivalent for the time being of the INSTITUTE OF CHARTERED SURVEYORS OF MALAYSIA or its equivalent (hereinafter referred to as "the Valuer") on the application of the Lessee (acting as an expert and not an arbitrator) and so that the revised rent to be determined by the Valuer shall be such as the Valuer shall decide is the monthly rent at which the Demised Land might reasonably be expected to be let at the date of the exercise of the Option to Renew PROVIDED THAT the Valuer shall determine the revised rent based upon the state and condition and structure of the Demised Land as at the 14th day of June 1999 evidenced by the Valuation Report on the Demised Land by MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. dated the 14th day of June 1999 and disregard any increase in the rental value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or 33 make a fair allowance to the Lessee in respect of such alteration or improvement PROVIDED ALWAYS THAT the revised rent shall under no circumstances be more than or less than fifteen per centum (15%) of the immediately preceding month's rent. (c) For the avoidance of doubt it is hereby expressly agreed and declared that in the event:- (i) the rent determined by the Valuer exceeds by more than fifteen per centum (15%) the preceding month's rent at the date of the exercise of the Option to Renew, the revised rent shall be fixed at fifteen per centum (15%) above the preceding month's rent; (ii) the rent determined by the Valuer is lower by fifteen per centum (15%) of the preceding month's rent at the date of the exercise of the option to renew, the revised rent shall be fixed at fifteen per centum (15%) below the preceding month's rent. (d) The option for the Lessee to terminate the renewed Lease under Clause 13 may be exercised at any time during the Renewed Term. 12. OPTION TO PURCHASE 12.1 If the Lessee wishes to purchase the Demised Land (hereinafter referred to as "the Option to Purchase") and shall at any time during the initial Contractual Term or the Renewed Term granted pursuant to Clause 11 give to the Lessor or MEC not less than one (1) month's notice in writing (hereinafter referred to as "the Lessee's Notice"), the Lessor and MEC shall upon the expiration of the Lessee's Notice and upon the payment of the sum ascertained in accordance with the provisions of Clause 12.2 transfer the Demised Land to the Lessee free from all encumbrances whatsoever subject to all conditions of title whether express or implied in the documents of title in respect of the Demised Land and to the terms and conditions set out in the Second Schedule of the Lease Annexure annexed hereto as the Second Schdule. 12.2 The Lessor or MEC and the Lessee shall attempt to reach agreement on the value of the Demised Land in the open market assuming vacant possession as at the date of the exercise of the Option to Purchase as agreed between the Lessor or MEC and the Lessee and if such agreement has not been reached within four (4) weeks from the date of service of the Lessee's Notice, then the Valuer shall be appointed by either party to determine the market value of the Demised Land as at the date of exercise of the Option to Purchase PROVIDED THAT the Valuer shall 34 determine the market value of the Demised Land based upon the existing state and condition and structure of the Demised Land as at the 14th day of June 1999 evidenced by the Valuation Report on the Demised Land by MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. dated the 14th day of June 1999 disregarding any increase in the market value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or making a fair allowance to the Lessee in respect of such alteration or improvement provided that in the event the Lessee is not agreeable to the value as determined by the Valuer it may at its own costs and expense appoint another valuer on the panel of valuers of the Chargee to value the open market value of the Demised Land disregarding any increase in the market value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or making a fair allowance to the Lessee in respect of such alteration or improvement and the purchase price of the Demised Land shall be the average of the two valuations and in the event the Lessee fails to appoint the second valuer within four (4) weeks of its notification to the Lessor or MEC of its disagreeement as to the open market value by the Valuer, the Option to Purchase shall lapse and be of no further effect. 12.3 The determination as to the market value of the Demised Land by the Valuer (who shall act as an expert and not as an arbitrator) shall subject to Clause 12.2(b) be final and binding on the Parties and his fees and expenses shall be borne equally by them and if either party shall pay the whole of such fees and expenses, it shall be entitled to receive one half from the other. 12.4 The sale and purchase of the Demised Land shall be subject to the additional terms and conditions set out in the Second Schedule of the Lease Annexure annexed hereto. 12.5 Notwithstanding the exercise of the Option to Purchase, the terms and provisions of this Agreement shall continue to take effect until the completion of the sale and purchase of the Demised Land and in particular this Agreement shall continue even if the sale and purchase of the Demised Land is not completed for any reasons whatsoever unless this Agreement is determined in accordance with the provisions herein. 13. OPTION TO TERMINATE If the Lessee wishes to determine this Agreement at any time after the expiry of the initial Contractual Term or at any time during the Renewed Term, the Lessee shall give the Lessor or MEC not less than three (3) months' 35 notice in writing then upon the expiry of such notice, the Contractual Term shall immediately cease and determine but without prejudice to the respective rights of either party in respect of any antecedent claim or breach of covenant. 14. TERMINATION ON DEFAULT 14.1 The Lessor or MEC may terminate this Agreement in the manner set out below in the following circumstances: (a) if the Rent or any part of it and other moneys owing to the Lessor under this Agreement is or are in arrears for thirty (30) days; (b) if the Lessee breaches a material provision of this Agreement and fails to remedy the breach within thirty (30) days from the date of service of Notice by the Lessor to do so. 14.2 In the circumstances set out in Clause 14.1, the Lessor or MEC may terminate this Agreement by: (a) notifying the Lessee to that effect; or (b) re-entering the Demised Land and repossessing it; or (c) doing both. 15. LAW The Law of Malaysia shall apply for the purpose of governing this Agreement and the Parties shall submit to the jurisdiction of the Courts in Malaysia. 16. COSTS, FEES AND STAMP DUTIES Each Party shall pay fees and disbursements of its own agents accountants solicitors and all other costs and expenses incurred by it in relation to the negotiation, preparation execution and completion of this Agreement and the Lessee shall pay the stamp duty in respect of this Agreement and the stamp duty and registration fees in respect of the Lease. 17. SERVICE OF DOCUMENT 17.1 Address for Service In this clause:- (a) "the Lessor's Address" means the following address of the Lessor or such other address as the Lessor may from time to time notify to the Lessee and MEC as being its address for service for the purpose of this Agreement: 36 KLIH PROJECT MANAGEMENT SDN. BHD. 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (b) "the Lessee's Address" means the following address of the Lessee or such other address as the Lessee may from time to time notify to the Lessor and MEC as being its address for service for the purposes of this Agreement: MCMS SDN. BHD. Plots 12 & 13, Phase IV, Free Industrial Zone, Bayan Lepas, 11900 Penang (c) "MEC's Address" means the following address of MEC or such other address as MEC may from time to time notify to the Lessor and the Lessee as being its address for service for the purposes of this Agreement: MEC AUDIO VISUAL PRODUCTS SDN. BHD. 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur 17.2 Notice Any notice or other communication given or made in accordance with this Agreement shall be in writing and:- (a) may (in addition to any other effective mode of service) be sent by registered post; (b) shall (in the case of a notice or other communication to the Lessor but subject to Clause 17.3(a)) be served on the Lessor at the Lessor's Address; (c) shall (in the case of a notice or other communication to the Lessee but subject to Clause 17.3(b)) be served on the Lessee at the Lessee's Address; and (d) shall (in the case of a notice or other communication to MEC but subject to Clause 17.3(c)) be served on MEC at MEC's Address. 17.3 Any notice or other communication given or made in accordance with this Agreement: (a) by or to the Lessor may be given or made by or to the Lessor's Solicitors on behalf of the Lessor; 37 (b) by or to the Lessee may be given or made by or to the Lessee's Solicitors on behalf of the Lessee; (c) by or to MEC may be given or made by or to MEC's Solicitors on behalf of MEC. 18. CHANGE OF ADDRESS Any changes of address by either party must be communicated to the other in writing. 19. SCHEDULE The First Schedule and the Second Schedule shall form part of this Agreement and shall be read, taken and construed as an essential part of this Agreement. 20. BREACH BY THE LESSOR 20.1 In the event the Lessor and/or MEC is in breach of any of the stipulations terms covenants and conditions contained in this Agreement, the Lessor and MEC shall jointly and severally indemnify and keep the Lessee fully indemnified against or arising from all loss damage costs expenses actions demands proceedings claim and liability (including all legal fees on a solicitor and client basis) made against or suffered or incurred by the Lessee. 20.2 Without prejudice to Clause 20.1, the Lessee shall be entitled to the remedy of specific performance in the event the Lessor and/or MEC unlawfully or improperly terminates this Agreement at any time before its expiration. 21. WAIVER OR INDULGENCE Knowledge or acquiescence by any Party of or in any breach by the Lessor or the Lessee or MEC of any of the terms and conditions herein contained or any indulgence given by any Party to the others shall not operate as or be deemed to be a waiver of such terms or conditions or any of them and notwithstanding such knowledge or acquiescence or indulgence, any Party shall be entitled to exercise its rights and powers under this Agreement and to require strict performance of the terms and condition herein contained. 22. ENTIRE UNDERSTANDING This Agreement embodies the entire understanding of the Parties relating to the Demised Land and to all the matters dealt with by any of the provisions of this Agreement. 38 23. PERSONS TO BE BOUND BY THIS AGREEMENT This Agreement shall be binding upon the successors in title and assigns of the Lessor and MEC and the successors in title, nominee, transferee and assigns of the Lessee. 24. SPECIFIC PERFORMANCE The Lessor, the Lessee and MEC shall be entitled to specific performance of this Agreement. 25. REPRESENTATION The Lessor, MEC and the Lessee represent, declare and undertake with each other that:- 25.1 It has the power to execute, deliver and perform the terms of this Agreement and has taken all necessary corporate and other action to authorise of the execution, delivery and performance of this Agreement. 25.2 This Agreement constitutes the legal valid and binding obligations of the Lessor, the Lessee and MEC in accordance with the terms and conditions contained in this Agreement. 25.3 All consents, approvals, authorisations, licences, orders and exemptions of any ministry, governmental agency, department or authority in Malaysia which are required on the part of the Lessor, MEC and/or the Lessee or any of them or which are advisable and the execution delivery performance and legality or enforceability of this Agreement have been or will be obtained and are in full force and any conditions contained therein or otherwise applying thereto have been or will be complied with. 39 ************* THE FIRST SCHEDULE CLAUSE 2.1 INVENTORY LIST OF FURNITURES AND FITTINGS 40 THE SECOND SCHEDULE CLAUSE 6.6 FORM OF LEASE ANNEXURE We, KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (hereinafter referred to as "the Lessor" which expression shall include its assigns or successors-in- title) being the registered proprietor of all those pieces of land described in the above Schedule together with the factory erected thereon (hereinafter referred to as "the Factory") known as located at Lorong Sg. Tiram, Bayan Lepas, FIZ II, 11900 Bayan Lepas, Penang with a built up area of approximately 117,927 square feet made up as follows: (a) production floor space 37,629 square feet; (b) office space 17,500 square feet; and (c) warehouse and other space 63,211.92 square feet and the furnitures, air-conditioners, lighting and other fittings as set out in the inventory list annexed hereto as the First Schedule (hereinafter referred to as "the Furniture and Fittings")(the abovementioned Land, the Factory and the Furnitures and Fittings are hereinafter collectively referred to as "the Demised Land") DO HEREBY LEASE the Demised Land to MCMS SDN. BHD. (Company No.399136-M), a company incorporated in Malaysia and having its registered office at 7th Floor(Room 7-02) Wisma Penang Garden, No.42 Jalan Sultan Ahmad Shah, 10050 Penang, Malaysia (hereinafter referred to as "the Lessee" which expression shall include ITS assigns or successors-in-title) in whom this Lease for the time being is vested TO BE HELD by the Lessee for a term of five (5) years with an option to renew for a further term of five (5) years (hereinafter referred to as "the Option to Renew"). RECITALS WHEREAS the Lessor is the registered proprietor of the Demised Land. AND WHEREAS the Lessor has charged the Demised Land to STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P), a company incorporated in Malaysia under the Companies Act, 1965 and having a place of business at No.2 Beach Street, 10300 Penang (hereinafter referred to as "the Chargee") under Charge Presentation No.3571/98 Volume No.780 Folio No.100 41 (hereinafter referred to as "the Charge") as security for a loan granted by the Chargee to MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (hereinafter referred to as "MEC"). AND WHEREAS by an agreement made the 22nd day of August 1996 between the Lessor of the one part and MEC of the other part (hereinafter referred to as "the Sale and Purchase Agreement") the Lessor, with the consent of the Chargee agreed to sell and MEC agreed to purchase the Demised Land for the consideration and upon the terms and conditions more fully set out in the Sale and Purchase Agreement. AND WHEREAS MEC has paid the full purchase price of the Demised Land and fully complied with the terms and conditions of the Sale and Purchase Agreement as hereby irrevocably and expressly acknowledged by the Lessor but the Demised Land has yet to be transferred to MEC. AND WHEREAS MEC and the Lessor, with the consent of the Chargee has agreed to let and the Lessee has agreed to take a lease of the Demised Land for the duration and upon the terms and conditions of this Lease. 1. DEFINITIONS AND INTERPRETATIONS 1.1 Definitions Unless the context shall otherwise require, the terms defined in Clause 1 shall for all purpose of this Lease have the meaning specified. Contractual : The period of three (3) years and three Terms (3) months and includes the renewed term if the Option to Renew specified in Clause 9 is exercised Chargee : STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P) Demised Land : All those five (5) pieces of land known as Lots No.P.T.1223, 1224, 1225 and 1226, Mukim 12, Daerah Barat Daya, Negeri Pulau Pinang held under Suratan Hakmilik Sementara No.H.S.(D)6941, 6942, 6943 AND 6944 and Lot No.8130, Mukim 12, Daerah Barat Daya held under Pajakan Negeri No.1765 as stated in the Schedule above together with the Factory erected thereon and the Furniture and Fittings thereto 42 Factory : The factory erected on the Demised Land located at Lorong Sg. Tiram, Bayan Lepas, FIZ II, 11900 Bayan Lepas, Penang with a built up area of 117,927 square feet made up as follows:- (a) production floor space 37,629 square feet (b) office space 17,500 square feet (c) warehouse and other space 63,211.92 square feet Furniture : The Furniture and Fittings in the Factory and Fittings as stated in the inventory list annexed hereto as the First Schedule Lease : The Lease of the Demised Land in Form 15A of the National Land Code for a term of three (3) years and three (3) months with an option to renew the Lease for a further term of three (3) years and three (3) months upon the same terms covenants and conditions contained herein and includes any instrument supplemental to it but at a revised rent as hereinafter provided Lessor : KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D) MEC : MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X) Option to : The option to renew the Lease for a further Renew term of three (3) years and three (3) months as provided in Clause 9 Parties/Party: It means the Lessor and/or the Lessee Renewed Term : The further period of three (3) years and three (3) months renewed pursuant to Clause 9 Rent : The amount of rental payable for the entire duration of the Lease and the renewed Lease which particulars are as described in Clause 3 herein Rent : The 1st day of September 1999 Commencement Date 43 Sale and : The Agreement made the 22nd day of August Purchase 1996 between the Lessor as vendor and MEC as Agreement purchaser in respect of the Demised Land Sub-Tenant : LEMTRONICS SDN. BHD. (Company No.167912-P), a company incorporated in Malaysia and having its registered office at Bayan Lepas, FIZ, Phase II, 11900 Bayan Lepas, Penang Valuer : The Valuer appointed pursuant to Clause 9.3(b) 1.2 Clauses and Clause Heading The Clause and paragraph heading in this Lease are for the ease of reference only and shall not be taken into account in the construction or interpretation of any covenants conditions or proviso to which they refer. 1.3 Singular and Plural Meanings Words in this Lease importing singular meaning shall where the context so admits include the plural meaning and vice versa. 1.4 Acts, Statute and Statutory Instruments References in this Lease to any Acts, statutes or statutory instrument shall include and refer to any Acts, statute or statutory instrument amending consolidating or replacing them respectively from time to time and for the time being in force. 1.5 Gender Words in this Lease of the masculine gender shall include the feminine and neuter gender and vice versa and words denoting natural persons shall include corporations and firms and all such words shall be construed interchangeably in that manner. 2. DEMISE The Lessor hereby demises and the Lessee hereby accepts a lease of the Demised Land inclusive of the Factory and the Furniture and Fittings TO HOLD the Demised Land to the Lessee for the Contractual Term SUBJECT to all rights easements privileges restrictions covenants and stipulations appearing in the title to the Demised Land YIELDING AND PAYING to the Lessor the Rent as stated and in the manner set out in Clause 3. 44 3. RENT 3.1 The Lessee shall pay the Lessor a Rent of Ringgit Malaysia One Hundred and Eighty Thousand (RM180,000.00) only per month for the Contractual Term in the following manner:- (a) the Rent for the first three (3) months or the first quarter of the Contractual Term shall be payable monthly in advance, the first month's Rent to be payable on the Rent Commencement Date and each subsequent payment for the next two (2) months to be made on or before the seventh (7th) day of each succeeding month; (b) the Rent for the rest of the Contractual Term shall be payable quarterly in advance on or before the seventh (7th) day of each succeding quarter. 3.2 There will be no increase in the Rent payable for the initial Contractual Term. 3.3 The Rent payable for the Renewed Term (in the event that the Lessee does exercise its option to renew) shall be the sum as calculated in accordance with Clause 9.3(b). 4. STATE AUTHORITY CONSENT 4.1 The Demised Land is subject to the following restrictions interest:- 4.1:1 The Demised Land shall not be transferred, charge, leased, sub-leased or otherwise in any manner dealt with or dispose of without the written sanction of the State Authority; and 4.1:2 The Demised Land shall not be sub- divided. 4.2 The State Authority has given its consent to the Lease herein. 5. LESSEE'S COVENANTS The Lessee covenants with the Lessor and/or its assigns as follows:- 5.1 To pay the Rent on the days and in the manner set out in this Lease; 5.2 To pay all charges (if any) for removal of refuse in connection with the occupation by the Lessee of the Demised Land; 5.3 To pay for all the water and electricity and other charges consumed on the Demised Land by the Lessee from 1st July 1999 and the Lessee shall be entitled to all income in respect of the Demised Land from 1st July 1999; 45 5.4 To remove any unauthorised additions made to the Demised Land at the expiration of the Contractual Term unless agreed upon not to by the Parties hereto and the Lessee shall make good any part or parts of the Demised Land which may be damaged by such removal; 5.5 To permit the Lessor and/or its authorised servants or agents at reasonable times to enter into and inspect and view the Demised Land and examine their conditions after a seven (7) days written notice is given to the Lessee Provided that the Lessor and/or its authorised servants or agents shall comply with all reasonable directions of the Lessee with respect to security procedures to be observed and protective gears and special clothings to be worn by the Lessor's servants and agents during the inspection; 5.6 To comply with the requirements of any relevant authorities relating to anything done upon the Demised Land by the Lessee and to indemnify the Lessor against all actions, proceedings, claims or demands which may be brought or made by reason of default in compliance with them; 5.7 To indemnify the Lessor against any claims proceedings or demands and costs and expenses so incurred which may be brought against the Lessor by any employees work people agents or visitors of the Lessee in respect of any accident loss or damage whatsoever to person or property on the Demised Land due to the negligence or wilful act of the Lessee; 5.8 To pay the Rent to the Chargee whose receipt the Lessor and MEC hereby irrevocably acknowledge to the valid and sufficient discharge to the Lessee and to this end the Lessor and MEC undertake to execute an Assignment of the Rent herein to the Chargee upon such terms and conditions as the Chargee may require; 5.9 Not to cause any land roads or pavements on the Demised Land to be untidy or in a dirty condition and in particular not to deposit on them refuse or other materials; 5.10 Not to use the Demised Land for any illegal or immoral activities or purpose or to keep any animals or pets in it other than guard dogs; 5.11 Not to do in or upon the Demised Land anything which may be a nuisance annoyance disturbance inconvenience or damage to the occupiers of neighbouring factories; 46 5.12 Not without the prior written consent of the Lessor to assign underlet, charge or part with the possession of the Demised Land or any part thereof save and except to the Sub-Tenant; 5.13 Not to commit any waste; and 5.14 Not to hold or permit or suffer to be held on the Demised Land any sale by public auction. 6. YIELD UP At the expiration of the Contractual Term or the sooner termination of this Lease, the Lessee shall:- 6.1 yield up the Demised Land in accordance with the terms of this Lease; 6.2 remove all signs erected by the Lessee in upon or near the Demised Land and immediately to make good any damage caused by such removal. 7. LESSOR'S COVENANTS The Lessor covenants and agrees with the Lessee as follows:- 7.1 that if the Lessee shall pay the Rent hereby reserved and observe and perform the stipulations on their part herein contained they shall peaceably hold and enjoy the Demised Land during the Contractual Term without any interruption by the Lessor or any person rightly claiming under or in trust for it; 7.2 to grant the Option to Renew the Lease as stated in Clause 9; 7.3 to procure MEC to pay all existing and future quit rents and rates (assessment) and outgoings payable by law in respect of the Demised Land which payments shall be deducted from the Rent as provided for in Clause 9.1(e) hereof; 7.4 to permit the Lessee to commence to fit out and renovate the Factory for its manufacturing and business activities forthwith upon execution of this Lease; 7.5 to permit the Lessee to repair and make good and any existing defects and damage to Factory at the cost and expense of the Lessor provided always that the costs of such repairs shall be evidenced by the appropriate receipts shall not exceed the sum of Ringgit Malaysia One Hundred and Six Thousand (RM106,000.00) and provided further that the Lessee shall advance for the costs of such repair and deduct such advances from the Rent payable under this Agreement; 47 7.6 to procure MEC to keep the roof, main structures, external walls, main drains and pipes of the Factory in good tenantable repair and condition including if required by the relevant authorities, to repaint and redecorate the external walls of the Factory; 7.7 to permit (but it shall not be obligatory upon) the Lessee to execute such repairs or works as verified by the Valuer or make such payments or perform such obligations of the Lessor and/or MEC herein including in particular MEC's covenants in Clauses 7.1(g) and 7.2 at the cost and expenses of MEC upon the failure or refusal of the Lessor and/or MEC to forthwith execute the same and any costs and expenses incurred shall be deducted or set off against the Rent payable herein subject to a maximum non-cumulative deduction equivalent to one (1) month's Rent per annum; 7.8 to procure MEC to indemnify and keep the Lessee fully indemnified against all breaches by the Lessor of its statutory duties or obligations including environmental damage due to or arising from anything done or carried out by the Lessor or its authorised servants agents workmen on the Demised Land; 7.9 to permit the Lessee to sublet any part of the Demised Land to the Sub-Tenant on such terms and conditions as the Lessee may deems fit; and 7.10 to insure and keep the Factory fully insured for the full cost of rebuilding and reinstating the same with a reputable insurance office in the joint names of the Lessor and the Lessee against destruction or damage by fire, lightning, explosion, aircraft (including articles dropped from aircraft), riot, civil commotion, malicious persons, earthquake, storm, tempest, flood, bursting and overflowing of water pipes, tanks and other apparatus and impact by road vehicles and in case of any such damage or destruction as aforesaid happening to the Factory or any part thereof to apply any money received by it in respect thereof under any insurance in reinstating and restoring the parts thereof so damaged or destroyed. Subject to and without prejudice to this Clause, if the Factory or any part thereof shall be rendered unfit for use by reason of the damage or destruction as aforesaid, the Rent or a fair proportion of the Rent according to the nature and extent of the damage or destruction sustained shall ceased to be payable until the Factory or the affected part shall have been rebuilt or reinstated so that the Factory or the affected part are made fit for occupation or use save and except that in the event that the Factory cannot be rebuilt and reinstated or if the Tenant is unable to await the rebuilding and reinstatement of the Factory, the Lease shall absolutely determine. 48 8. LESSEE'S PROPERTY In the event that any property of the Lessee shall remain in or on the Demised Land after the Lessee has vacated the Demised Land on the expiry of the Contractual Term and the Lessee fails to remove it within fourteen (14) days after being requested in writing by the Lessor to do so or if after using its best endeavour the Lessor is unable to locate the Lessee within fourteen (14) days from the first attempt so made by the Lessor: 8.1 The Lessor shall have the right to remove the property and all costs and expenses incurred for such removal and storage thereafter shall be borne by the Lessee; 8.2 The Lessor shall not be responsible for any actions damages claims proceedings costs expenses and demands caused by or related to the removal of the property; 8.3 The Lessor shall not be liable for any loss or damages suffered on the Lessee's property as a result of the removal and storage of the property. 9. OPTION TO RENEW 9.1 If the Lessee: (a) has paid the Rent regularly during the Contractual Term; (b) has reasonably performed and observed the covenants contained in this Lease; (c) notifies the Lessor in accordance with Section 9.2 below; (d) then at the end of the initial Contractual Term the Lessor shall grant and the Lessee shall take a further lease for the Renewed Term of the Demised Land in accordance with the provisions set out in Section 9.3 below (hereinafter referred to as "the Renewed Term"). 49 9.2 A notice of exercise of option: (a) must state clearly that the Lessee wishes to take a further lease of the Demised Land in accordance with the option contained in the Lease; and (b) must be served not later than three (3) months before the end of the period of the initial Contractual Term. 9.3 The provision for the further lease will be the same as the provisions of this Lease, with the following exceptions: (a) the new lease will begin immediately after the end of the period of the initial Contractual Term; (b) the rent at the commencement of the new lease will be as mutually agreed between the Lessor and the Lessee and if the revised rent has not been agreed by the parties within one (1) month of the exercise of the Option to Renew, the same shall be determined by MR KHOO TIANG HUAT or any valuer of C.H.WILLIAMS, TALHAR & WONG SDN. BHD. (Company No.18149-U) of No.35 Green Hall, 10200 Penang or if MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. are no longer in property valuation practice, any independent valuer nominated by the President or its equivalent for the time being of the INSTITUTE OF CHARTERED SURVEYORS OF MALAYSIA or its equivalent (hereinafter referred to as "the Valuer") on the application of the Lessee (acting as an expert and not an arbitrator) and so that the revised rent to be determined by the Valuer shall be such as the Valuer shall decide is the monthly rent at which the Demised Land might reasonably be expected to be let at the date of the exercise of the Option to Renew PROVIDED THAT the Valuer shall determine the revised rent based upon the state and condition and structure of the Demised Land as at the 14th day of June 1999 evidenced by the Valuation Report on the Demised Land by MESSRS C.H.WILLIAMS, TALHAR & WONG SDN. BHD. dated the 14th day of June 1999 and disregard any increase in the rental value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or make a fair allowance to the Lessee in respect of such alteration or improvement AND PROVIDED ALWAYS THAT the revised rent shall under no circumstances be more than or less than fifteen per centum (15%) of the immediately preceding month's rent. 50 (c) For the avoidance of doubt it is hereby expressly agreed and declared that in the event: (i) the rent determined by the Valuer exceeds by more than fifteen per centum (15%) the preceding month's rent at the date of the exercise of the Option to Renew, the revised rent shall be fixed at fifteen per centum (15%) above the preceding month's rent; (ii) the rent determined by the Valuer is lower by fifteen per centum (15%) of the preceding month's rent at the date of the exercise of the option to renew, the revised rent shall be fixed at fifteen per centum (15%) below the preceding month's rent. (d) the option for the Lessee to terminate the renewed Lease under Clause 13 may be exercised at any time during the Renewed Term. 10. OPTION TO PURCHASE 10.1 If the Lessee wishes to purchase the Demised Land (hereinafter referred to as "the Option to Purchase") and shall at any time during the initial Contractual Term or the Renewed Term granted pursuant to Clause 9 give to the Lessor not less than one (1) month's notice in writing(hereinafter referred to as "the Lessee's Notice"), the Lessor shall upon the expiration of the Lessee's Notice and upon the payment of the sum ascertained in accordance with the provisions of Clause 10.2 transfer the Demised Land to the Lessee free from all encumbrances whatsoever subject to all conditions of title whether express or implied in the documents of title in respect of the Demised Land and to the terms and conditions set out in the Second Schedule. 10.2 The Lessor and the Lessee shall attempt to reach agreement on the value of the Demised Land in the open market assuming vacant possession as at the date of the exercise of the Option to Renew as agreed between the Lessor and the Lessee and if such agreement has not been reached within four (4) weeks from the date of service of the Lessee's Notice, then the Valuer shall be appointed by either party to determine the market value of the Demised Land as at the date of exercise of the Option to Purchase PROVIDED THAT the Valuer shall determine the market value of the Demised Land based upon the state and condition and structure of the Demised Land as at the 14th day of June 1999 evidenced by the Valuation Report on the Demised Land by Messrs CH Williams, Talhar & Wong Sdn Bhd dated the 14th day of June 1999 disregarding any increase in the market value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or making a fair allowance to the Lessee in respect of such alteration or improvement provided that in the event the Lessee is not 51 agreeable to the value as determined by the Valuer it may at its own costs and expense appoint another valuer on the panel of valuers of the Chargee to value the open market value of the Demised Land disregarding any increase in the market value of the Demised Land attributable to the existence of any alteration or improvement to the Demised Land and/or making a fair allowance to the Lessee in respect of such alteration or improvement and the purchase price of the Demised Land shall be the average of the two valuations and in the event the Lessee fails to appoint the second valuer within four (4) weeks of its notification to the Lessor of its disagreeement as to the open market value by the Valuer, the Option to Purchase shall lapse and be of no further effect. 10.3 The determination as to the market value of the Demised Land by the Valuer (who shall act as an expert and not as an arbitrator) shall subject to Clause 10.2(b) be final and binding on the parties and his fees and expenses shall be borne equally by them and if either party shall pay the whole of such fees and expenses, it shall be entitled to receive one half from the other. 10.4 The sale and purchase of the Demised Land shall be subject to the additional terms and conditions set out in the Second Schedule. 10.5 Notwithstanding the exercise of the Option to Purchase the terms and provisions of this Lease shall continue to take effect until the completion of the sale and purchase of the Demised Land and in particular this Lease shall continue even if the sale and purchase of the Demised Land is not completed for any reasons whatsoever unless this Lease is determined in accordance with the provisions herein. 11. OPTION TO TERMINATE If the Lessee wishes to determine this Lease at any time after the expiry of the initial Contractual Term or at any time during the Renewed Term and shall give the Lessor not less than three (3) months' notice in writing then upon the expiry of such notice, the Contractual Term shall immediately cease and determine but without prejudice to the respective rights of either party in respect of any antecedent claim or breach of covenant. 12. TERMINATION ON DEFAULT 12.1 The Lessor may terminate the Lease in the manner set out below in the following circumstances: 52 (a) if the Rent or any part of it and other moneys owing to the Lessor under the Lease is or are in arrears for thirty (30) days; (b) if the Lessee breaches a material provision of this Lease and fails to remedy the breach within thirty (30) days from the date of service of Notice by the Lessor to do so. 12.2 In the circumstances set out in Clause 12.1, the Lessor may terminate the Lease by: (a) notifying the Lessee to that effect; or (b) re-entering the Demised Land and repossessing it; or (c) doing both. 13. LAW The Law of Malaysia shall apply for the purpose of governing this Lease and the Parties shall submit to the jurisdiction of the Courts in Malaysia. 14. COSTS, FEES AND STAMP DUTIES Each Party shall pay fees and disbursements of its own agents accountants solicitors and all other costs and expenses incurred by it in relation to the negotiation, preparation execution and completion of this Lease and the Lessee shall pay the stamp duty and registration fees in respect of this Lease. 15. SERVICE OF DOCUMENT 15.1 Address for Service In this clause: (a) "the Lessor's Address" means the following address of the Lessee or such other address as the Lessor may from time to time notify to the Lessee as being its address for service for the purpose of this Lease: KLIH PROJECT MANAGEMENT SDN. BHD. 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur (b) "the Lessee's Address" means the following address of the Lessee or such other address as the Lessee may from time to time notify to the Lessee as being its address for service for the purposes of this Lease: 53 MCMS SDN. BHD. Plots 12 & 13, Phase IV, Free Industrial Zone, Bayan Lepas, 11900 Penang 15.2 Notice Any notice or other communication given or made in accordance with this Lease shall be in writing and: (a) may (in addition to any other effective mode of service) be sent by registered post; (b) shall (in the case of a notice or other communication to the Lessor but subject to Clause 15.3(a)) be served on the Lessor at the Lessor's Address; (c) shall (in the case of a notice or other communication to the Lessee but subject to Clause (b)) be served on the Lessee at the Lessee's Address; 15.3 Any notice or other communication given or made in accordance with this Agreement: (a) by or to the Lessor may be given or made by or to the Lessor's Solicitors on behalf of the Lessor; (b) by or to the Lessee may be given or made by or to the Lessee's Solicitors on behalf of the Lessee. 16. CHANGE OF ADDRESS Any changes of address by either party must be communicated to the other in writing. 17. SCHEDULE The First Schedule, Second Schedule and Third Schedule hereto shall form part of this Lease and shall be read, taken and construed as an essential part of this Lease. 18. BREACH BY THE LESSOR 18.1 In the event the Lessor is in breach of any of the stipulations terms covenants and conditions contained in this Lease, the Lessor shall indemnify and keep the Lessee indemnified against or arising from all loss damage costs expenses actions demands proceedings claim and liability (including all legal fees on a solicitor and client basis) made against or suffered or incurred by the Lessor. 18.2 Without prejudice to Clause 20.1, the Lessee shall be entitled to the remedy of specific performance in the event the Lessor unlawfully or improperly terminates this Lease at any time before its expiration. 54 19. WAIVER OR INDULGENCE Knowledge or acquiescence by either Party of or in any breach by the Lessor or the Lessee of any of the terms and conditions herein contained or any indulgence given by either Party to the other shall not operate as or be deemed to be a waiver of such terms or conditions or any of them and notwithstanding such knowledge or acquiescence or indulgence, either Party shall be entitled to exercise its rights and powers under this Lease and to require strict performance of the terms and condition herein contained. 20. ENTIRE UNDERSTANDING This Lease embodies the entire understanding of the Parties relating to the Demised Land and to all the matters dealt with by any of the provisions of this Lease. 21. PERSONS TO BE BOUND BY THIS LEASE This Agreement shall be binding upon the successors in title and assigns of the Lessor and the successors in title, nominee, transferee and assigns of the Lessee. 22. SPECIFIC PERFORMANCE The Lessor and the Lessee shall be entitled to specific performance of this Agreement. 23. REPRESENTATION The Lessor and the Lessee represent, declare and undertake with each other that: 23.1 It has the power to execute, deliver and perform the terms of this Lease and has taken all necessary corporate and other action to authorise of the execution, delivery and performance of this Lease. 23.2 This Lease constitute the legal valid and binding obligation of the Lessor and the Lessee in accordance with the terms and conditions contained in this Lease. 23.3 All consents, approvals, authorisations, licences, orders and exemptions of any ministry, governmental agency, department or authority in Malaysia which are required on the part of the Lessor and/or the Lessee or any of them or which are advisable and the execution delivery performance and legality or enforceability of this Lease have been or will be obtained and are in full force and any conditions contained therein or otherwise applying thereto have been or will be complied with. 55 ************* THE FIRST SCHEDULE INVENTORY LIST OF FURNITURES AND FITTINGS 56 THE SECOND SCHEDULE ADDITIONAL TERMS AND PROVISIONS OF THE SALE AND PURCHASE OF THE DEMISED LAND -------------------------------------- 1. Purchase Price The purchase price shall be as determined in accordance with Clause 10.2. 2. Terms of Payment of Purchase Price 2.1 The purchase price shall be paid on or before the completion date as defined in paragraph 3 below. 2.2 The Lessee is hereby irrevocably authorised to utilise any or all of the purchase price to redeem the Charge over the Demised Land. In the event the redemption sum in respect of the Charge exceeds the purchase price, the Lessor undertakes to forthwith pay to the Lessee the difference between the redemption sum and the purchase price. 2.3 The Lessee is further irrevocably authorised to retain a sufficient sum of money from the purchase price towards payment of Real Property Gains Tax under Section 21B of the Real Property Gains Tax Act 1976. 3. Completion Date Completion shall take place within one (1) month from the date of the compliance of all the conditions precedent stated in paragraph 4 below. 4. Conditions Precedent 4.1 The sale and purchase of the Demised Land is conditional upon the approval of the Penang State Authority and the Ministry of Trade and Industry or the Foreign Investment Committee of the Government of Malaysia (as the case may be) without condition or (if conditional) upon terms and conditions acceptable to the Lessee within six (6) months from the date of the exercise of the option or such extended time as may be mutually agreed by the parties. 4.2 Notwithstanding anything to the contrary herein, the Lessee shall be entitled to waive any of the conditions precedent in paragraph 4.1. 57 5. Conditions Affecting The Demised Land The Demised Land is sold: 5.1 with vacant possession; 5.2 free from all encumbrances but subject to all conditions of title whether express or implied affecting the Demised Land. 6. Real Property Gains Tax 6.1 Each party shall file the necessary return under Section 13 of the Real Property Gains Tax Act 1976 within the time prescribed in the section. 6.2 The Lessor undertakes to indemnify and keep the Lessee fully indemnified against all Real Property Gains Tax arising from the disposal of the Demised Land by the Lessor to the Lessee. 7. Caveat The Lessee shall be entitled at any time after the exercise of the option to purchase to enter a Private Caveat against the Demised Land. 8. Time Time shall be of the essence of the contract. 9. Specific Performance The Lessee shall be entitled to the specific performance of the purchase of the Demised Land. 10. Sale and Purchase Agreement Within fourteen (14) days of the exercise of the Option to Purchase, the parties shall execute a Sale and Purchase Agreement containing the above terms and conditions and in the form of the Sale and Purchase Agreement annexed hereto as the Third Schedule. 58 THE THIRD SCHEDULE FORM OF SALE AND PURCHASE AGREEMENT THIS AGREEMENT is made the day of 1999 BETWEEN:- 1. PARTIES 1.1 The Vendor 1.1:1 KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur ("KLIH"); and 1.1:2 MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur ("MEC"). KLIH and MEC are both hereinafter referred to as "the Vendor". 1.2 Purchaser MCMS SDN. BHD. (Company No.339136-M), a company incorporated in Malaysia and having its registered office at 7th Floor (Room 7-02) Wisma Penang Garden, No.42 Jalan Sultan Ahmad Shah, 10050 Penang ("the Purchaser"). 2. RECITALS 2.1 KLIH is the registered proprietor of all those five (5) pieces of land described in the Schedule hereto and measuring approximately 168,250 square feet (hereinafter referred to as "the Land"). 2.2 The Land is charged to STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P), a company incorporated in Malaysia under the Companies Act 1965 and having a place of business at No.2 Beach Street, 10300 Penang (hereinafter referred to as "the Chargee") under Charge Presentation No.3571/98 Volume No.780 Folio No.100 hereinafter referred to as "the Charge" as security for a loan granted by the Chargee to MEC. 2.3 By an agreement made the 22nd day of August 1996 between KLIH of the one part and MEC of the other part (hereinafter referred to as "the Sale and Purchase Agreement") KLIH, with the consent of the Chargee sold and MEC purchased the Land for the consideration and upon the terms and conditions more fully set out in the Sale and Purchase Agreement. 59 2.4 MEC has paid the full purchase price of the Land and fully complied with the terms and conditions of the Sale and Purchase Agreement as hereby irrevocably and expressly acknowledged by KLIH but the Land has yet to be transferred to MEC. 2.5 The Land is subject to the following restrictions in interest:- 2.5:1 The Land shall not be transferred, charge, leased, sub-leased or otherwise in any manner dealt with or dispose of without the written sanction of the State Authority; and 2.5:2 The Land shall not be sub-divided. 2.6 The Vendor with the consent of the Chargee has agreed to sell and the Purchaser has agreed to buy the Land on the terms and conditions hereinafter contained in this Agreement. 3. DEFINITIONS The following terms have the following meanings:- "1960 Act" : Land Acquisition Act 1960 "1976 Act" : Real Property Gains Tax Act 1976 "Acquisition : Notice published Notice" in the Government Gazette under Section 4 of the 1960 Act "Agreement Date" : The date of this Agreement "Assessment : the notice of assessment from the Notice Director-General under Section 17 of the 1976 Act in respect of the disposal of the Land under this Agreement "the Certificate : the certificate of clearance issued of Clearance" by the Director- General pursuant to the 1976 Act in respect of the sale of the Land by the Vendor to the Purchaser under this Agreement "Chargee" : STANDARD CHARTERED BANK MALAYSIA BERHAD (Company No.115793-P) 60 "Charge" : the National Land Code Charge Presentation No.3571/98 Volume No.780 Folio No.100 created over the Land by KLIH "Code" : National Land Code 1965 "Competent : a person or body exercising powers under Authority" statute or any other written law "Completion" : the payment of the Price by the Purchaser in accordance with the provisions of this Agreement "Completion Date" : the last day of the period of one (1) month from the date all of the conditions precedent in Clause 5 is complied with (provided always that the Purchaser is entitled to waive any of the conditions precedents) or three (3) months from the Agreement Date, whichever is the later "Consultants" : the architect, the quantity surveyor, the landscape consultants, engineers, interior designers and any other Consultants which the Vendors may have appointed in respect of the Land "Declaration" : declaration published in the Government Gazette under Section 8 of the 1960 Act "Director-General": Director-General of Inland Revenue "FIC/MITI : the approval of the FIC and/or MITI Approval" (as the case may be) to the sale and purchase of the Land herein referred to in Clause 5.2 "FIC" : Foreign Investment Committee of the Government of Malaysia "Final Balance" : the Price less the Tax Retention and the Redemption Sum "Financier" : the financial institution financing the purchase of the Land herein by the Purchaser "Holiday" : a day other than a Working Day "MITI" : Ministry of International Trade and Industry of the Government of Malaysia 61 "Payment Period" : one of the periods for which a sum payable periodically under Clause 8.17:4 is payable whether or not such periods are of equal length "Price" : the sum of Ringgit Malaysia (RM ) "the Land" : all those five (5) pieces of land more particularly described in the Schedule hereto "Purchaser's : the solicitors MESSRS GHAZI & LIM Solicitors" whose office is at 19th Floor, MWE Plaza, No.8 Lebuh Farquhar, 10200 Pulau Pinang. Fax No: 04-2633188/04-2627433 "Redemption Sum" : a sum equal to the amount payable to the Chargee before it will discharge the Charge according to the Redemption Statement referred to in Clause 6.2:4 "Vendor's : the solicitors MESSRS Solicitors" "Tax Retention" : the sum of Ringgit Malaysia (RM ) only being the amount to be retained by the Vendor's Solicitors as stakeholders under Section 21B of the 1976 Act "Working Day" : any day from Monday to Saturday except for public holidays gazetted in the Government Gazette having effect in the State of Penang 4. INTERPRETATION 4.1 The expression "Vendor" and "Purchaser" include the heirs personal representatives and successors in title (as the case may be) of the Vendor and the Purchaser. The expression "the Purchaser" shall also include its nominee and assigns. 4.2 Where the Vendor or the Purchaser are two or more persons warranties representations agreements covenants and obligations expressed or implied to be made by or with such party are deemed to be made by or with such persons jointly and severally. 62 4.3 Words importing one gender include all other genders and words importing the singular include the plural and vice versa. 4.4 The expression "month" shall be construed as calendar month. 4.5 The expression "person" and "persons" includes corporations and natural persons. 4.6 Any obligations by a party not to do an act or thing shall be deemed to include an obligation to use all endeavours not to permit or suffer such act or thing to be done by another person. 4.7 The term "the parties" means the Vendor and the Purchaser. 4.8 The term "the party" means the Vendor or the Purchaser. 4.9 Reference to "notices" or "notice" mean a notice in writing signed by or on behalf of the person making or giving the notice. 4.10 Reference to "the Government Gazette" mean the Gazette of the Government of Malaysia or the Gazette of the Government of the State of Penang (as the case may be). 4.11 Any references to a specific statute include any statutory extension or modification amendment or re- enactment of such statute and any regulations or orders made under such statute and any general reference to "statute" or "statutes" or words to similar effect includes any regulations or orders made under such statute or statutes. 4.12 Reference in this Agreement to any clause or sub-clause without further designation shall be construed as a reference to the clause or sub-clause to this Agreement so numbered. 4.13 The clause and paragraph heading do not form part of this Agreement and shall not be taken into account in its construction or interpretation. 4.14 Time wherever mentioned or referred to in this Agreement shall be of the essence. 4.15 Any provision in this Agreement which expressly permits or requires the Vendor's Solicitors or the Purchaser's Solicitors to do or omit to do a thing shall be construed as irrevocable authority given by the Vendor and the Purchaser (as the case may be) to do or omit to do that thing. 63 5. AGREEMENT TO SELL AND PURCHASE AND CONDITIONS PRECEDENT 5.1 Agreement to Sell and Purchase The Vendor shall sell and the Purchaser shall purchase the Land free from all encumbrances and with vacant possession for the Price subject to the following terms and conditions. 5.2 FIC/MITI Approval 5.2:1 This Agreement is conditional upon the Purchaser obtaining the approval of the FIC and/or (as the case may be) MITI without conditions or (if conditional) upon terms and conditions acceptable to the Purchaser within the period of six (6) months from the Agreement Date or such further extended period as the parties hereto may agree in writing (hereinafter referred to as "the FIC/MITI Approval"). 5.2:2 The Purchaser shall at its own cost and expense apply for the FIC/MITI Approval within one (1) month from the Agreement Date and furnish the Vendor with copies of such application and the Vendor shall within ten (10) days of the written request by the Purchaser furnish the Purchaser with such information and execute such documents as may be required for the purposes of the application for the FIC/MITI Approval. 5.2:3 In the event the FIC/MITI Approval is not obtained or is granted subject to conditions not acceptable to the Purchaser as specified in Clause 5.2:1 within the said period of six (6) months or the said extended period, either party may terminate this Agreement forthwith in writing and the provisions of Clause 8.3 shall apply but such rescission shall be without prejudice to the rights or remedies of either party in respect of any antecedent breach of this Agreement. 5.3 State Authority Consent 5.3:1 This Agreement is further conditional upon the Purchaser obtaining the approval of the Penang State Authority to the sale and purchase of the Land herein by the Purchaser without conditions or (if conditional) upon terms and conditions acceptable to the Purchaser within the period of six (6) months from the Agreement Date or such further extended period as the parties hereto may agree in writing (hereinafter referred to as "the State Authority Consent"). 64 5.3:2 The Purchaser shall at its own cost and expense apply for the State Authority Consent within one (1) month from the date of the FIC/MITI Approval and furnish the Vendor with copies of such application and the Vendor shall within ten (10) days of the written request by the Purchaser furnish the Purchaser with such information and execute such documents as may be required for the purposes of the application for the State Authority Consent. 5.3:3 In the event the State Authority Consent is not obtained or is granted subject to conditions not acceptable to the Purchaser as specified in Clause 5.3:1 within the said period of six (6) months or the said extended period, either party may terminate this Agreement forthwith in writing and the provisions of Clause 8.3 shall apply but such rescission shall be without prejudice to the rights or remedies of either party in respect of any antecedent breach of this Agreement. 6. THE VENDOR'S OBLIGATIONS 6.1 The Vendor's Returns 6.1:1 The Vendor shall: 6.1:1.1 within the time provided in the 1976 Act; and 6.1:1.2 in accordance with the provisions of the 1976 Act; make the necessary returns to the Director-General in respect of its sale of the Land under this Agreement and furnish the Purchaser or the Purchaser's Solicitors with sufficient evidence of the compliance of the provisions of the 1976 Act by the Vendor. 6.1:2 If the Vendor shall fail to notify and submit the necessary returns to the Director-General as required by Clause 6.1:1 and if as a result of such failure of the Vendor the Purchaser is liable to pay a penalty for the delay in paying the stamp duties or late registration fee, if any, due on the Transfer in respect of the Land, the Vendor shall be jointly and severally responsible and liable for the amount of the penalty on the stamp duties and late registration fee. 65 6.1:3 Notwithstanding anything to the contrary, the Vendor undertakes to indemnify the Purchaser and keep the Purchaser fully indemnified against any liability, damage, claim, proceedings, expense, loss and/or damage in respect of real property gains tax under the 1976 Act or any other taxation or liabilities of the Vendor arising from the disposal of the Land by the Vendor. 6.2 Delivery of Documents The Vendor shall deliver forthwith upon execution of this Agreement (if he has not already done so) to the Purchaser's Solicitors: 6.2:1 photocopies of the Documents of Title in respect of the Land; 6.2:2 photocopies of the quit rent receipts in respect of the Land for 1999; 6.2:3 photocopies of the current assessment receipts (where applicable); and 6.2:4 a statement in writing from the Chargee to the Purchaser stating the amount payable to the Chargee before it will discharge the Charges (hereinafter referred to as "the Redemption Statement"); 6.2:5 photocopies of any current insurance policies taken out in respect of the Land together with the insurers' receipt for the last premiums due in respect of such policies; and 6.2:6 two certified true copies each of the Memorandum and Articles of Association, list of shareholders and directors and the appropriate resolution of the Vendor authorising the sale of the Land herein. 6.3 Execution of Transfer The Vendor shall immediately upon the execution of this Agreement deliver to the Purchaser's Solicitors:- 6.3:1 valid and registrable Transfers of the Land in duplicate in favour of the Purchaser or its nominee duly executed by the Vendor; 6.3:2 original and 4 copies of the Stamp Duty Information Form (PDS 15) in respect of such Transfers duly executed by the Vendor; 66 who shall hold them as stakeholders in accordance with the provisions of Clause 8.7:1. 6.4 Statutory Obligations The Vendor warrants that it has not done and shall not do in or near the Land any act or thing by reason of which the Purchaser may under any statute incur have imposed upon it or become liable to pay any penalty damages compensation costs charges or expenses. 6.5 Written Communications The Vendor shall within 5 Working Days of the receipt of a written communication from a Competent Authority relating to the Land or before the Completion Date (whichever is the earlier) deliver to the Purchaser a photocopy of such communication. 6.6 Outgoings The Vendor warrants and represents that all rates, taxes, assessments, duties, charges, impositions and other outgoings charged, assessed or imposed upon the Land or upon the owner or occupier of the Land have been paid up to date and shall be apportioned as at Completion Date. 6.7 Discharge of Consultants 6.7:1 The Vendor warrants that there are no outstanding professional or consultancy fees, charges, disbursements and costs whatsoever due to the Consultants and undertakes to indemnify the Purchaser against all claims, damages, losses, action, demands and proceedings whatsoever in respect of the same. 6.7:2 The Vendor shall discharge all Consultants (if any) employed by them in respect of the Land and shall procure letters of release from the Consultants in respect of the Land. 6.8 Redemption Statement Upon execution of this Agreement, the Vendor shall procure from the Chargee a statement in writing addressed to the Purchaser stating the amount payable to the Chargee before it will discharge the Charges (hereinafter referred to as "the Redemption Statement"). 67 6.9 Issue Document of Title 6.9:1 Notwithstanding anything stated herein to the contrary upon:- (i) the written notification by the Purchaser's Solicitors that the Purchaser's application for a loan from a financial institution (hereinafter referred to as "the Financier") has been approved; (ii) a letter of undertaking from the Financier to the Vendor stating to the effect that the Financier shall release the loan amount to the Vendor upon the presentation for the registration of the Memorandum of Transfer in favour of the Purchaser and the Charge in favour of the Financier and/or the perfection of the security documentation of the Financier; (iii) the payment by the Purchaser to the Vendor of the difference between the Price and the loan amount; the Vendor shall deliver or procured to be delivered to the Purchaser or the Purchaser's Solicitors the issue Document of Title in respect of the Land together with all other documents incumbent upon the Vendor to furnish to the Purchaser to enable the Land to be registered in the name of the Purchaser free from all encumbrances (hereinafter referred to as "the Documents"). 6.9:2 The Vendor shall upon request by the Purchaser deliver an undertaking to refund to the Financier the loan amount or any part released in the event that the Transfers cannot be registered for any reasons whatsoever. 6.9:3 The Vendor shall forthwith upon execution of this Agreement procure the Chargee to deliver to the Financier a letter of undertaking to deliver within seven (7) days of the receipt of the Redemption Sum:- 6.9:3.1 the issue documents of title to the Land; 6.9:3.2 the duplicate Charge; 6.9:3.3 valid and registrable discharge of the Charge; 68 and to refund the Redemption Sum to the Financier in the event the discharge of the Charge cannot be registered for any reasons whatsoever. 7. PURCHASER'S OBLIGATIONS 7.1 The Price The Price of RM shall be paid by the Purchaser on or before the Completion Date in the following manner:- 7.1:1 to the Chargee the Redemption Sum to secure the discharge of the Charge; 7.1:2 to the Vendor's Solicitors as stakeholders in accordance with Clause 8.8 the Tax Retention; 7.1:3 to the Vendor the Final Balance (if any); PROVIDED ALWAYS AND IT IS HEREBY EXPRESSLY AGREED that notwithstanding anything to the contrary herein, in the event the Purchaser is taking a loan to finance the purchase of the Land, any payment or undertaking to pay to the Vendor from the Purchaser's Financier shall be valid and sufficient discharge of the Purchaser's obligations in this Clause 7.1. 7.2 Purchaser's Returns The Purchaser shall:- 7.2:1 within the time provided in the 1976 Act; and 7.2:2 in accordance with the provisions of the 1976 Act; make the necessary returns to the Director-General in respect of its purchase of the Land under this Agreement. 8. GENERAL 8.1 Matters Affecting the Property 8.1.1 The Land is sold:- 8.1:1 with vacant possession; 8.1:2 free from all encumbrances whatsoever; 8.1:3 subject to all conditions of title whether express or implied affecting the Land imposed by or under the Code unless provided otherwise in this Agreement; and 8.1:4 subject to the Vendor's delivery to the Purchaser good, marketable and registrable titles to the Land. 69 8.1.2 In the event that there is any defect in the titles or there are dealings or encumbrances affecting the Land, the Vendor shall perfect the title or discharge all encumbrances or dealings affecting the Land at the cost and expense of the Vendor. 8.2 Rescission Rights The Purchaser may by service of a notice on the Vendor or the Vendor's Solicitor:- 8.2:1 at any time before Completion rescind this Agreement (but without prejudice to any other rights or remedies of the Purchaser):- 8.2:1.1 in the event the Vendor breaches any of the provisions of Clauses 6.3 to 6.9; 8.2:1.2 where subject to Clause 8.2:1.3 a matter discovered by either the Purchaser or the Purchaser's Solicitors whether before or after the Agreement Date is likely to materially reduce the Price which a willing Purchaser could otherwise reasonably be expected to pay for the Land in the open market on the Agreement Date; 8.2:1.3 if all or any of the area of the Land is affected by any Acquisition Notice or Declaration published in the Government Gazette after the Agreement Date but on or before the Completion Date; 8.2:1.4 in the event a petition for winding-up is presented against or a winding-up order is made against the Vendor before Completion; 8.2:1.5 in the event the Vendor enters into any arrangement or compromise for the benefit of its creditors before Completion; 8.2:2 before or after Completion (as the case may be) rescind this Agreement (but without prejudice to any other rights or remedies of the Purchaser):- 8.2:2.1 in the event the Transfers in respect of any of the Land executed by the Vendor cannot be registered after Completion; 70 8.2:2.2 in the event the Vendor is unable to give the Purchaser good marketable or registrable titles to any of the Land; 8.2:2.3 all or any of the searches and supplementary enquiries submitted to the Majlis Perbandaran Pulau Pinang and/or the relevant Land Office or Land Registry (as the case may be) reveal matters adverse to any of the Land; and upon the service of the notice referred to in Clause 8.2:1 or 8.2:2 (as the case may be) in accordance with the provisions of Clause 8.2:1 or 8.2:2 (as the case may be) this Agreement shall be rescinded and the provisions of Clause 8.3 shall apply. 8.3 Rescission and Termination Consequences In the event of the rescission or termination of this Agreement in accordance with the provisions of Clauses 5.2:3, 5.3:3, 8.2:1, 8.2:2, 8.15 or 8.16 the following shall take effect:- 8.3:1 the Vendor shall within seven (7) Working Days of such rescission or termination taking effect refund to the Purchaser any part of the Price paid to them by the Purchaser or the Purchaser's Solicitors; 8.3:2 subject to Clause 8.3:1 being complied with by the Vendor, the Purchaser's Solicitors shall:- 8.3:2.1 return to the Vendor the Transfers and Stamp Duty Information Form given by the Vendor under the provisions of Clauses 6.3:1 and 6.3:2 unless the Purchaser's Solicitors have already sent delivered or presented such Transfer or Stamp Duty Information Forms to the Purchaser or the Competent Authority following Completion (in the event it has taken place); and 8.3:2.2 refund to Purchaser any part of the Price held by them under this Agreement and not already paid to the Vendor; 71 8.3:3 subject to Clause 8.3:1 being complied with by the Vendor, the Purchaser shall return to the Vendor the Transfer and Stamp Duty Information Forms referred to in Clause 8.3:2.1 sent or given to the Purchaser by the Purchaser's Solicitors following Completion; and 8.3:4 in the case of rescission or termination under Clauses 8.15 or 8.16 no interest cost or compensation shall be payable by either party. 8.4 Default of the Purchaser In the event the Purchaser fails to pay the Price in accordance with the provisions of this Agreement and/or a winding-up order is made against the Purchaser the Vendor may by notice rescind this Agreement and upon service of such notice: 8.4:1 the Purchaser's Solicitors shall return to the Vendor the Transfer and Stamp Duty Information Forms given by the Vendor under the provision of Clauses 6.3:1 and 6.3:2; 8.4:2 subject to Clause 8.4:1 no interest cost or compensation shall be payable by either party; and 8.4:3 this Agreement shall become null and void and of no further effect and neither party shall have any claim against the other whether arising out of this Agreement or otherwise. 8.5 Outgoings The Purchaser shall be liable for all outgoings from the Completion Date. 8.6 Private Caveat The Purchaser may at any time after the execution of this Agreement enter a Private Caveat against the title to the Land to protect its rights and interests under this Agreement. 8.7 The Purchaser's Solicitors Duties The Purchaser's Solicitors: 8.7:1 shall in the event the Vendor deliver the Transfers and Stamp Duty Information Form referred to in Clause 6.3 in accordance with the provisions of that clause not part possession with such Transfers and Stamp Duty Information Form until Completion except:- 72 8.7:1.1 for the purpose of Stamp Duty adjudication and/or stamping of such Transfers; 8.7:1.2 to enable the Purchaser to:- (i) obtain a loan from a financial institution to finance (whether wholly or partly) the purchase of the Land by the Purchaser; and (ii) obtain the release of such loan by such financial institution to pay the Price. 8.8 Real Property Gains Tax 8.8:1 The Vendor's Solicitors shall upon payment to them of the Tax Retention in accordance with the provisions of Clauses 7.1:2 hold the Tax Retention until the Vendor's Solicitors have received a copy of the Certificate of Clearance from the Director- General or evidence of payment of the Assessment Notice whereupon the Vendor's Solicitors shall pay the Vendor the Tax Retention or in the event the Vendor's Solicitors have paid the Director-General in accordance with the provisions of Clause 8.8:2, such part of it remaining if any. 8.8:2 The Vendor's Solicitors shall in the event:- 8.8:2.1 the Purchaser receives from the Director-General any requests made under Section 21B of the 1976 Act requiring the Purchaser to pay any sum of money in respect of the sale of the Land by the Vendor to the Purchaser under this Agreement; and 8.8:2.2 the Purchaser requires the Vendor's Solicitors to pay the Director-General:- (i) the whole of the Tax Retention (in the event the sum demanded under such request is equal to or exceeds the Tax Retention); or (ii) such part of the Tax Retention as may be sufficient to pay the sum demanded under such requests (in the event such sum demanded is less than the Tax Retention); 73 comply with such requirement of the Purchaser and the receipt of the Director- General shall be sufficient discharge to the Vendor's Solicitors to the extent of the amount paid to and received by the Director-General. 8.9 Payments and the Solicitors 8.9:1 Payments of any moneys whether by or to the Vendor or the Vendor's Solicitors or the Purchaser or the Purchaser's Solicitors under this Agreement shall be made either by:- 8.9:1.1 cheque drawn by the Vendor's Solicitors; 8.9:1.2 cheque drawn by the Purchaser or the Purchaser's Solicitors; 8.9:1.3 Banker's Draft; or 8.9:1.4 Banker's Cheque. 8.9:2 Any payments to be made by the Vendor or the Purchaser (as the case may be) shall be deemed made to the Purchaser or the Vendor if paid to the Purchaser or the Vendor (as the case may be) or the Purchaser's Solicitors or the Vendor's Solicitors (as the case may be) whose receipt shall be a good and sufficient discharge to the Vendor or the Purchaser (as the case may be). 8.10 Full Force And Effect Even After The Payment All warranties representations agreements covenants and obligations of whatever nature given made or undertaken under or pursuant to this Agreement shall (except for any obligations fully performed before or on Completion) continue in full force and effect even after Completion. 8.11 The Purchaser's Right To Assign And To Specific Performance 8.11:1 This Agreement and all rights in it may be assigned or transferred by the Purchaser and the Purchaser shall be entitled to specific performance of this Agreement. 8.11:2 This Agreement and all rights in it shall not be assigned by the Vendor. 74 8.12 Notices 8.12:1 Notices to the Vendor shall (without prejudice to any other means of service) subject to Clause 8.12:5 be deemed served on the Vendor if delivered or sent by hand A.R.Registered Post telex facsimile electronic mail or any other means of electronic transmission to the following address:- KLIH PROJECT MANAGEMENT SDN. BHD. (Company No.14962-D) 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur FAX NO: MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X) 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur FAX NO: 8.12:2 Notices to the Purchaser shall (without prejudice to any other means of service) subject to Clause 8.12:5 be deemed served on the Purchaser if delivered or sent by hand A.R.Registered Post telex facsimile electronic mail or any other means of electronic transmission to the following address:- MCMS SDN. BHD. Plots 12 & 13, Phase IV, Free Industrial Zone, Bayan Lepas, 11900 Penang FAX NO: 8.12:3 Notices to the Vendor's Solicitors shall (without prejudice to any other means of service) subject to Clause 8.12:5 be deemed served on the Vendor's Solicitors if delivered or sent by hand A.R.Registered Post telex facsimile electronic mail or any other means of electronic transmission to the Vendor's Solicitors office at the address stated in Clause 3. 8.12:4 Notices to the Purchaser's Solicitors shall (without prejudice to any other means of service) subject to Clause 8.12:5 be deemed served on the Purchaser's Solicitors if delivered or sent by hand A.R.Registered Post telex facsimile electronic mail or any other means of electronic transmission to the Purchaser's Solicitors at the address stated in Clause 3. 75 8.12:5 Notices shall be deemed given:- 8.12:5.1 in the case of hand delivery only upon written acknowledgment of receipt by the addressee or any partner or officer or other employee agent or representative of the addressee; 8.12:5.2 in the case of A.R.Registered Post only upon written acknowledgment of receipt on the A.R.Card by the addressee or any partner or officer or other employee agent or representative of the addressee; 8.12:5.3 in the case of telex upon receipt of answerback; 8.12:5.4 in the case of facsimile or electronic mail upon receipt of transmission; 8.12:5.4 in the case of any other means of electronic transmission upon receipt of the transmission; 8.13 Delivery of Items Other Than Notices 8.13:1 Items other than Notices to be delivered to the Vendor shall (without prejudice to any other means of delivery) subject to Clause 8.13:5 be deemed delivered to the Vendor if delivered by hand or sent by A.R.Registered Post to the Vendor's address stated in Clause 8.12:1. 8.13:2 Items other than Notices to be delivered to the Purchaser shall (without prejudice to any other means of delivery) subject to Clause 8.13:5 be deemed delivered to the Purchaser if delivered by hand or sent by A.R.Registered Post to the Purchaser's address stated in Clause 8.12:2. 8.13:3 Items other than Notices to be delivered to the Vendor's Solicitors shall (without prejudice to any other means of delivery) subject to Clause 8.13:5 be deemed delivered to the Vendor's Solicitors if delivered by hand or sent by A.R.Registered Post to the Vendor's Solicitors office at the address stated in Clause 3. 76 8.13:4 Items other than Notices to be delivered to the Purchaser's Solicitors shall (without prejudice to any other means of delivery) subject to Clause 8.13:5 be deemed delivered to the Purchaser's Solicitors if delivered by hand or sent by A.R.Registered Post to the Purchaser's Solicitors office at the address stated in Clause 3. 8.13:5 Items other than Notices shall be deemed delivered:- 8.13:5.1 in the case of hand delivery only upon written acknowledgment of receipt by the addressee or any partner or officer or other employee agent or representative of the addressee; 8.13:5.2 in the case of A.R.Registered Post only upon written acknowledgment of receipt on the A.R.Card by the addressee or any partner or officer or other employee agent or representative of the addressee. 8.14 Waiver 8.14:1 No right under this Agreement shall be deemed waived unless made or confirmed in writing and signed by or on behalf of the party waiving such right. 8.14:2 A waiver by a party shall be without prejudice to its rights or remedies in respect of any other breach of this Agreement by either of the parties. 8.14:3 Subject to Clause 8.14:2 any failure by a party to enforce any of the provisions of this Agreement or any forebearance delay or indulgence granted by that party to the other party shall not be construed as a waiver of that party's rights under this Agreement. 8.15 Severance If any provision of this Agreement is declared by any judicial or other competent authority to be void voidable illegal or otherwise unenforceable the remaining provisions of this Agreement shall remain in full force and effect unless the Purchaser in its discretion decide that the effect of such declaration defeats the original intention of the parties in which even the Purchaser shall be entitled to terminate this Agreement by 5 Working Days notice to the Vendor and the provisions of Clause 8.3 will have effect. 77 8.16 Force Majeure The parties shall be released from their respective obligations in the event of national emergency war prohibitive governmental regulation or of any other cause beyond the reasonable control of the parties or either of them which renders the performance of this Agreement impossible whereupon this Agreement shall terminate and the provisions of Clause 8.3 shall have effect provided that this clause shall have effect only if the Purchaser serve a notice on the Vendor that it shall have effect. 8.17 Apportionments 8.17:1 On Completion the income and outgoings of the Land shall subject to Clause 8.17:2 be apportioned as at the Completion Date. 8.17:2 Clause 8.17 shall not apply to any sum if:- 8.17:2.1 the Purchaser cannot by reason only of becoming the owner of the Land either enforce payment of it or be obliged to pay it; or 8.17:2.2 it is an outgoing paid in advance unless the Vendor cannot obtain repayment and the Purchaser as a result benefit or is given credit against a sum that would otherwise be its liability. 8.17:3 For the purposes of apportionment only it shall be assumed:- 8.17:3.1 until the end of the Completion Date; 8.17:3.2 that the sum to be apportioned:- 8.17:3.2:1 accrues from day to day; 8.17:3.2:2 is payable throughout the relevant period at the same rate as on the Completion Date. 8.17:4 Sums payable periodically shall be apportioned by charging or allowing:- 8.17:4.1 for any Payment Period entirely attributable to one party the whole of the instalment payable for such Payment Period; 78 8.17:4.2 for any part of a Payment Period a proportion on an annual basis. 8.17:5 In the event:- 8.17:5.1 any sum payable in respect of any period fails wholly or partly before the Completion Date; and 8.17:5.2 the amount of such sum is not notified to either party before Completion; a provisional apportionment shall be made on the best estimate available and upon the amount being notified a final apportionment shall be made and one party shall then make to the other the appropriate balancing payment. 8.18 Completion Date 8.18:1 Subject to Clauses 8.18:2 and 8.18:3 Completion shall take place on the last day of the period of one (1) month from the date of compliance of all the conditions precedent in Clause 5 (provided always that the Purchaser shall be entitled to waive any of the conditions precedents) or three (3) months from the Agreement Date, whichever is the later. 8.18:2 In the event the Purchaser wishes Completion to take place earlier the Purchaser shall give the Vendor notice of such wish and the date on which it wishes Completion to take place and the Completion Date shall then be such date stated in such notice as the date on which the Purchaser wishes the Completion Date to be. 8.18:3 In the event the date fixed or stipulated under the provisions of Clauses 8.18:1 and 8.18:2 for Completion to take place is a Holiday then the date for Completion to take place will be the next following Working Day. 8.18:4 On Completion the Vendor shall deliver or procure to be delivered to the Purchaser the original issue documents of title in respect of the Land and all other documents incumbent upon the Vendor to deliver to the Purchaser to enable the Purchaser to be registered as proprietor of the Land free from all encumbrances. 79 8.19 Vendor's Undertaking During the continuance of this Agreement the Vendor hereby undertake with the Purchaser that the Vendor shall not sell, transfer, dispose off, charge, lease, assign, licence or part with the possession of the Land or deal with the Land in any manner whatsoever without prior written consent of the Purchaser and shall keep the Land in the same condition as they are at the Agreement Date. 8.20 Supersedes Prior Agreements This Agreement supersedes any prior agreements between the parties whether written or oral and any such prior agreements are cancelled as at the date of this Agreement but without prejudice to any rights which have already accrued to either of the parties. 8.21 Change of Address Each party shall serve notice on the other of the change or acquisition of any address and of any telephone telex facsimile electronic mail or similar number at the earliest possible opportunity but in any event within 48 hours of such change or acquisition. 8.22 Rights Cumulative All rights granted to either of the parties shall be cumulative and no exercise by either of the parties of any right under this Agreement shall restrict or prejudice the exercise of any other right granted by this Agreement or otherwise available to it. 8.23 Costs and Stamp Duties 8.23:1 Subject to Clause 8.23:2 each party shall pay the fees and disbursements of its own agents accountants solicitors and all other costs and expenses incurred by it in relation to the negotiation preparation execution and completion of this Agreement. 8.23:2 The Purchaser shall pay the stamp duty on the original and 3 counterpart of this Agreement and all the stamp duty and registration fees in respect of the Transfer executed by the Vendor under this Agreement. 80 THE SCHEDULE ABOVE REFERRED TO (Clause 2.1) The Land All those five (5) pieces of land situate in Mukim 12 Daerah Barat Daya, Negeri Pulau Pinang described below:- COLUMN 1 COLUMN 2 COLUMN 3 Lot No./ P.T.No. Title No. Area 1. 1223 H.S.(D)6941 37,910 square feet 2. 1224 H.S.(D)6942 4,532 square feet 3. 1225 H.S.(D)6943 5,554 square feet 4. 1226 H.S.(D)6944 2,615 square feet 5. 8130 Pajakan Negeri 10,929 square metres or No.1765 117,639 square feet ------------------- 168,250 square feet =================== 81 IN WITNESS WHEREOF the parties hereto have hereunto set their hands and seals the day and year first above written. The Common Seal of KLIH ) PROJECT MANAGEMENT SDN. ) BHD.(Company No.14962-D) ) was hereunto duly affixed) in the presence of:- ) /s/ Anthony Chew /s/ Chong Fui Nyee .................. .................. Director Director/Secretary The Common Seal of MEC ) AUDIO VISUAL PRODUCTS SDN.) BHD. (Company No.170217-X)) was hereunto duly affixed ) in the presence of:- ) /s/ Terence Selvarajah /s/ Lim Tian Huat ...................... .................. Director Director/Secretary The Common Seal of ) MCMS SDN. BHD. (Company ) No. 399136-M) was duly ) affixed in the presence ) of:- ) /s/ Azliza Baizura Bt Azmel /s/ Ron Gines ........................... .................. Director Director/Secretary 82 ENDORSEMENT BY STANDARD CHARTERED BANK MALAYSIA BERHAD ------------------------------------------------------ We, STANDARD CHARTERED BANK MALAYSIA BERHAD(Company No.115793- P), a company incorporated in Malaysia under the Companies Act, 1965 and having a place of business at No.2 Beach Street, 10300 Penang, the Chargee hereinbefore mentioned hereby acknowledge and grant our consent to the Lease, the Option to Renew and the Option to Purchase herein. Dated this 18th day of June 1999. SIGNED for and on behalf of ) STANDARD CHARTERED BANK STANDARD CHARTERED BANK ) MALAYSIA BERHAD MALAYSIA BERHAD (Company No.) By Its Attorney(s) 115793-P) by its Attorney in) the presence of:- ) /s/ Azliza Baizura Bt Azmel /s/ Richard Kong Mun Choy ............................ ......................... 83 ACKNOWLEDGEMENT AND ACCEPTANCE BY MEC OF THE TERMS HEREINBEFORE MENTIONED -------------------------------------- We, MEC AUDIO VISUAL PRODUCTS SDN. BHD. (Company No.170217-X), a company incorporated in Malaysia and having its registered office at 11th Floor, Wisma KLIH, No.126 Jalan Bukit Bintang, 55100 Kuala Lumpur, the beneficial owner of the Demised Land hereinbefore mentioned, hereby agree and consent to the Lease, the Option to Renew and the Option to Purchase herein and acknowledge accept and undertake to abide by, discharge, perform and observe all the terms and conditions stipulated herein this Lease Annexure as though we are a party to this Lease. We hereby confirm and agree that the words "Lessor" wheresoever appearing in the Lease shall be deemed to include and bind us as though we are the Lessor. This acknowledge, acceptance and confirmation shall be binding upon our successors in title. The Common Seal of MEC AUDIO) VISUAL PRODUCTS SDN. BHD. ) (Company No. 170217-X) was ) hereunto affixed in the ) presence of:- ) /S/ Terence Selvarajah /s/ Lim Tian Huat ....................... .................. Director Director/Secretary 84 EX-10.4(C) 3 AMENDMENT NO. 1 TO REVOLVING CREDIT, EQUIPMENT LOAN AND SECURITY AGREEMENT THIS AMENDMENT NO. 1 ("Amendment") is entered into as of July 13, 1999, by and among MCMS, INC., an Idaho corporation ("Borrower"), PNC BANK, NATIONAL ASSOCIATION ("PNC"), FLEET CAPITAL CORPORATION ("Fleet"), IBJ WHITEHALL BUSINESS CREDIT CORPORATION ("IBJ") and PNC as agent (in such capacity, "Agent") for Lenders (as hereafter defined). BACKGROUND Borrower, Agent and various financial institutions (together with PNC, Fleet and IBJ, collectively, the "Lenders") are parties to a Revolving Credit, Equipment Loan and Security Agreement dated as of February 26, 1999 (as amended, supplemented or otherwise modified from time to time, the "Loan Agreement") pursuant to which Agent and Lenders provide Borrower with certain financial accommodations. Borrower has requested that Agent and Lenders (a) increase the inventory advance rates, (b) increase the inventory sublimit, (c) make loans and advances to Borrower against machinery and equipment and (d) modify the calculation of Undrawn Availability, and Agent and Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrower by Agent and by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 3 below, the Loan Agreement is hereby amended as follows: (a) Section 1.2 of the Loan Agreement is amended as follows: (i) the following defined terms are added in their appropriate alphabetical order: "Amendment No. 1" shall mean Amendment No. 1 to Revolving Credit, Equipment Loan and Security Agreement dated as of July 13, 1999 among Agent, Lenders and Borrower. 85 "Amendment No. 1 Effective Date" shall mean the date when the conditions of effectiveness set forth in Section 3 of Amendment No. 1 are met to Lenders' satisfaction. "Amortized Amount" shall mean, during any month, an amount equal to $186,666.67. "Amortizing Availability" shall mean an amount equal to (i) (A) the lesser of (a) $11,200,000 or (b) up to seventy five percent (75%) subject to the provisions of Section 2.1(b) hereof (the "Equipment Advance Rate"), of the orderly liquidation value of the Eligible Equipment, less (ii) on the first day of each month during the Term commencing with the first full month following the Amendment No. 1 Effective Date, the Amortized Amount, less (iii) the orderly liquidation value of any Equipment included in the calculation of clause (i) of this definition which is sold, transferred, scrapped, or otherwise disposed of by Borrower or is transferred to any location other than any of Borrower's locations listed on Schedule 4.5 to this Agreement. "Eligible Equipment" shall mean and include the Equipment listed on the appraisal performed on behalf of Agent, a copy of which is attached hereto as Exhibit C. "Equipment Advance Rate" shall have the meaning set forth in the definition of Amortizing Availability. "Finished Goods Inventory Advance Rate" shall have the meaning set forth in Section 2.1(b) hereof. "WIP Inventory Advance Rate" shall have the meaning set forth in Section 2.1(b) hereof. (ii) the following defined term is hereby amended in its entirety to provide as follows: "Undrawn Availability" at a particular date shall mean an amount equal to (a) the Formula Amount, minus (b) the sum of (i) the outstanding amount of Revolving Advances, plus (ii) all amounts due and owing to Borrower's trade creditors which are outstanding more than sixty (60) days beyond the due date thereof, plus (iii) fees and expenses for which Borrower is liable hereunder which are due and payable but which have not been paid or charged to Borrower's Account. (b) Section 2.1(a)(y) of the Loan Agreement is hereby amended in its entirety to provide as follows: (i) up to 85%, subject to the provisions of Section 2.1(b) hereof ("Receivables Advance Rate"), of Eligible Receivables, plus 86 (ii) up to the lesser of (A)(i) 10%, subject to the provisions of Section 2.1(b) hereof ("Raw Material Inventory Advance Rate"), of the value of Eligible Inventory consisting of raw materials plus (ii) up to the lesser of (1) 70%, subject to the provisions of Section 2.1(b) hereof ("Finished Goods Inventory Advance Rate"), of the value of Eligible Inventory consisting of finished goods and (2) $1,000,000 plus (iii) 60%, subject to the provisions of Section 2.1(b) hereof (the "WIP Inventory Advance Rate"), of the value of Eligible Inventory consisting of work-in-process (the Receivables Advance Rate, the Raw Material Inventory Advance Rate, Finished Goods Inventory Advance Rate, the WIP Inventory Advance Rate and the Equipment Advance Rate shall be referred to collectively, as the "Advance Rates") or (B) the lesser of (i) $15,000,000 (the "Inventory Cap") or (ii) 50% of the amount derived from the sum of Sections 2.1(a)(y)(i) and (ii)(A) or (B)(i), in the aggregate at any one time, plus (iii) Amortizing Availability, minus (iv) such reserves as Agent may reasonably deem proper and necessary from time to time. The amount derived from the sum of (x) Sections 2.1(a)(y)(i), (ii) and (iii) minus (y) Section 2.1(a)(y)(iv) at any time and from time to time shall be referred to as the "Formula Amount". The Revolving Advances shall be evidenced by one or more secured promissory notes (collectively, the "Revolving Credit Note") substantially in the form attached hereto as Exhibit 2.1(a). (c) Section 15.2(b) of the Loan Agreement is hereby amended as follows: (i) clause (ii) is amended in its entirety to provide as follows: "extend the maturity of any Note or the due date of any amount payable hereunder, or reduce the principal amount of any scheduled installment payment due hereunder, or decrease the rate of interest or reduce any fee payable by Borrower to Lenders pursuant to this Agreement." (ii) a new clause (ix) is added to the end thereof to provide as follows: "decrease the amount of Undrawn Availability Borrower is required to maintain pursuant to Section 6.5 hereof from the amount established as of the Closing Date." 3. Conditions of Effectiveness. This Amendment shall become effective upon satisfaction of the following conditions precedent: Agent shall have received (i) six (6) copies of this Amendment executed by Borrower and Lenders and consented and agreed to by Guarantors, (ii) UCC-1 financing statements duly executed by Borrower to be filed with the Secretary of State of the State of California, the Secretary of the Commonwealth of Massachusetts and the Town Clerk of Stowe, (iii) a letter agreement duly executed by Borrower with respect to the patents listed on Schedule A to this Amendment together with a Patent Grant of Security related thereto duly executed by Borrower and 87 Agent, and (iv) and such other certificates, instruments, documents, agreements and opinions of counsel as may be required by Agent or its counsel, each of which shall be in form and substance satisfactory to Agent and its counsel. 4. Representations and Warranties. Borrower hereby represents and warrants as follows: (a) This Amendment and the Loan Agreement, as amended hereby, constitute legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms. (b) Upon the effectiveness of this Amendment, Borrower hereby reaffirms all covenants, representations and warranties made in the Loan Agreement to the extent the same are not amended hereby and agree that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Amendment. (d) Borrower has no defense, counterclaim or offset with respect to the Loan Agreement. 5. Effect on the Loan Agreement. (a) Upon the effectiveness of Section 2 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended herein, the Loan Agreement, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not, operate as a waiver of any right, power or remedy of Agent or any Lender, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 6. Governing Law. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 7. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 8. Counterparts. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which when taken together shall constitute one and the same agreement. 88 IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first written above. MCMS, INC. /s/ Chris J. Anton Vice President Finance, CFO PNC BANK, NATIONAL ASSOCIATION, as Agent and a Lender /s/ Ryan Peak Vice President Commitment Percentage: 41.7% FLEET CAPITAL CORPORATION, as a Lender /s/ Carmen Caporrino Vice President Commitment Percentage: 37.5% IBJ WHITEHALL BUSINESS CREDIT CORPORATION, as a Lender /s/ Bruce Kasper Vice President Commitment Percentage: 20.8% [SIGNATURES CONTINUED ON FOLLOWING PAGE] 89 CONSENTED AND AGREED TO: MCMS CUSTOMER SERVICES, INC. /s/ Chris J. Anton President MCMS HOLDINGS, LLC /s/ Chris J. Anton President 90 SCHEDULE A New Patents/Patent Applications Patent No. Country Title 5,874,323 US Improved Carrier Socket for Receiving a Damaged IC 5,876,498 US Method and Apparatus for Preserving Solder Paste in the Manufacturing of Printed Circuit Board Assemblies 5,892,367 US Thermal Box for a Semiconductor Test System 09/270,646 US Method of Utilizing a Plasma Gas Mixture Containing Argon and CF4 to Clean and Coat a Conductor 5,871,808 US Method for preserving Solder Paste in the manufacturing of printed circuit board assemblies. 5,899,446 US Universal fixture for holding printed circuit boards during processing. 5,906,364 US Air bladder fixture tooling for supporting circuit board assembly processing. 5,910,024 US Carrier socket for receiving a damaged IC. 91 PATENT GRANT OF SECURITY WHEREAS, MCMS, INC., a corporation formed under the laws of the State of Idaho located at 16399 Franklin Road, Nampa, Idaho 83687 ("Borrower"), owns the patents and patent applications shown in the attached Schedule A (the "Patents"), for which there are recordings or applications in the United States Patent and Trademark Office under the numbers shown in the attached Schedule A; and WHEREAS, Borrower is obligated to PNC Bank, National Association ("PNC"), the various other financial institutions (together with PNC, collectively, the "Lenders") named in or which hereafter become a party to the Loan Agreement (as hereafter defined) and PNC as agent for Lenders (in such capacity, "Agent"), pursuant to (i) a certain Revolving Credit, Equipment Loan and Security Agreement, dated February 26, 1999 (as such agreement may be amended, restated, modified or supplemented from time to time, the "Loan Agreement"), among Agent, Lenders and Borrower; and (ii) a certain Patent Collateral Security Agreement, dated February 26, 1999 (as such agreement has been amended by that certain Letter Agreement dated the date hereof and may be amended, modified, restated or supplemented from time to time, the "Security Agreement" and together with the Loan Agreement, the "Agreements") made by Borrower in favor of Agent for its benefit and for the ratable benefit of Lenders; and WHEREAS, pursuant to the Agreements, Borrower is granting to Agent for its benefit and for the ratable benefit of Lenders a security interest in the Patents, all proceeds thereof, all rights corresponding thereto and all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof. NOW, THEREFORE, for good and valuable consideration, receipt of which is hereby acknowledged, Borrower does hereby collaterally assign unto Agent and grant to Agent for its benefit and for the ratable benefit of Lenders a security interest in and to the Patents, which collateral assignment and security interest shall secure all of the Obligations as defined in the Agreements and in accordance with the terms and provisions thereof. [SIGNATURE PAGE TO FOLLOW] 92 Borrower expressly acknowledges and affirms that the rights and remedies of Agent and Lenders with respect to the collateral assignment and security interest granted hereby are more fully set forth in the Agreements. Dated: New York, New York July 13, 1999 MCMS, INC. Witness: /s/ Cathy Brokaw /s/ Chis J. Anton .................. ......................./ Name: Christian J. Anton Title: Vice President, Finance and Chief Financial Officer PNC BANK, NATIONAL ASSOCIATION, as Agent Witness: /s/ Josephine Griffin /s/ Ryan Peak ...................... ....................... Name: Ryan Peak Title: Vice President 93 STATE OF IDAHO ) ss. COUNTY OF CANYON ) On this 13th day of July, 1999, before me personally came Christian J. Anton, to me known, who, being by me duly sworn, did depose and say that he is the Vice President, Finance and Chief Financial Officer of MCMS, INC., the corporation described in and which executed the foregoing instrument; and that he signed his name thereto by order of the board of directors of said corporation. /s/ Cathy Brokaw __________________________________ Notary Public STATE OF NEW YORK ) ss. COUNTY OF MIDDLESEX ) On this 13th day of July, 1999, before me personally came Ryan Peak, to me known, who, being by me duly sworn, did depose and say that he is the Vice President of PNC BANK, NATIONAL ASSOCIATION, the association described in and which executed the foregoing instrument; and that he was authorized to sign his name thereto on behalf of said association. /s/ Josephine Griffin __________________________________ Notary Public 94 SCHEDULE A Schedule A to a Patent Grant of Security dated July 13, 1999, by and between MCMS, INC. and PNC BANK, NATIONAL ASSOCIATION, as Agent. Patent No. Country Title 5,874,323 US Improved Carrier Socket for Receiving a Damaged IC 5,876,498 US Method and Apparatus for Preserving Solder Paste in the Manufacturing of Printed Circuit Board Assemblies 5,892,367 US Thermal Box for a Semiconductor Test System 09/270,646 US Method of Utilizing a Plasma Gas Mixture Containing Argon and CF4 to Clean and Coat a Conductor 5,871,808 US Method for preserving Solder Paste in the manufacturing of printed circuit board assemblies. 5,899,446 US Universal fixture for holding printed circuit boards during processing. 5,906,364 US Air bladder fixture tooling for supporting circuit board assembly processing. 5,910,024 US Carrier socket for receiving a damaged IC. 95 PNC Bank, National Association Two Tower Center East Brunswick, New Jersey 08816 July 13, 1999 MCMS, Inc. 16399 Franklin Road Nampa, Idaho 83687 Attention: Christian Anton Dear Mr. Anton: Reference is made to that certain (a) Revolving Credit, Equipment Loan and Security Agreement dated February 26, 1999 (as same may be amended, restated, modified or supplemented from time to time, the "Loan Agreement") among MCMS, Inc. ("Borrower"), the financial institutions which are now or hereafter become a party thereto (collectively, the "Lenders") and PNC Bank, National Association ("PNC"), as agent for Lenders (PNC in such capacity, the "Agent") and (b) Patent Collateral Security Agreement dated as of February 26, 1999 (as the same may be amended, restated, modified or supplemented from time to time, the "Security Agreement") between Borrower and Agent. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Loan Agreement. Since the Closing Date, Borrower has acquired a number of new patents (the "New Patents"). Borrower has granted a security interest in the New Patents to Agent for its benefit and for the ratable benefit of Lenders pursuant to the terms and conditions of the Loan Agreement and Security Agreement. To induce Agent and Lenders to continue to provide financial accommodations to Borrower pursuant to the Loan Agreement, this letter will confirm our agreement to amend in their entirety Schedule A of the Security Agreement and Schedule 5.9 of the Loan Agreement and replace each of them with Schedule A attached hereto. To secure the prompt payment of your obligations under the Loan Agreement and the Security Agreement, you hereby grant to Agent for its benefit and for the ratable benefit of Lenders a security interest in all of the "Collateral" under the Loan Agreement and the Security Agreement as amended herein and you hereby reaffirm, represent and agree that Agent has a first priority security interest in all of the Collateral described on Schedule A to this letter. [SIGNATURE PAGE TO FOLLOW] 96 Except as expressly specifically provided herein, all of the representations, warranties, terms, covenants and conditions of the Loan Agreement and the Security Agreement shall continue to be and shall remain, in full force and effect in accordance with their respective terms. The amendments set forth herein shall be limited precisely as provided herein and shall not be deemed an amendment of, consent to or modification of any other term or provision of the Loan Agreement and the Security Agreement or of any transaction or future action on your part requiring our consent under the Loan Agreement and the Security Agreement. This letter may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which taken together shall constitute one and the same agreement. If you are in agreement with the foregoing, kindly execute this letter in the space provided below and return same to the undersigned. This letter shall become effective upon receipt by Agent of six (6) copies of this letter executed by Borrower. Very truly yours, PNC BANK, NATIONAL ASSOCIATION, as Agent /s/ Ryan Peak ____________________________ Title: Vice President ACCEPTED AND AGREED TO: MCMS, INC. /s/ Chis J. Anton __________________________ Title: Vice President, Finance and Chief Financial Officer 97 EX-27 4
5 1,000 9-MOS SEP-2-1999 JUN-3-1999 1,530 0 44,578 323 45,072 92,482 106,310 40,216 165,646 60,392 0 28,352 5 5 (126,717) 165,646 317,896 317,896 300,310 300,310 16,900 0 14,669 (13,983) (3,497) (10,486) 0 (617) 0 (11,103) (2.75) (2.75)
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